Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if BlackRock Kelso Capital (Nasdaq: BKCC ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at BlackRock Kelso Capital.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||34.5%||Pass|
|1-Year Revenue Growth > 12%||(15.2%)||Fail|
|Margins||Gross Margin > 35%||100%||Pass|
|Net Margin > 15%||67.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||24.3%||Pass|
|Current Ratio > 1.3||0.75||Fail|
|Opportunities||Return on Equity > 15%||11.6%||Fail|
|Valuation||Normalized P/E < 20||16.95||Pass|
|Dividends||Current Yield > 2%||12.9%||Pass|
|5-Year Dividend Growth > 10%||21.7%||Pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
BlackRock Kelso Capital scores an impressive seven points. Among top-yielding dividend stocks, the asset manager is a bit different from many of its peers.
Lately, dividend investors looking for double-digit yields have latched onto real estate investment trusts. With mortgage-focused REITs Annaly Capital (NYSE: NLY ) and Chimera Investment (NYSE: CIM ) using favorable interest rate spreads to capture big profits, shareholders have gotten the double benefit of huge dividend payments as well as explosive price rises in their shares.
But BlackRock Kelso has a different model, acting as a private-equity business development company providing mezzanine level financing to promising young companies. Like fellow BDCs Apollo Investment (Nasdaq: AINV ) and American Capital (Nasdaq: ACAS ) , BlackRock Kelso pays out the vast majority of its income as dividends. As with REITs, the requirement to pay out the bulk of their income gives BDCs big dividend yields.
Unfortunately, BlackRock Kelso hasn't been firing on all cylinders lately. Shares fell sharply last month as the company announced poor earnings for 2010. And with lower returns on equity than American Capital or Ares Capital (Nasdaq: ARCC ) , BlackRock Kelso isn't impressing potential new investors with its performance.
BlackRock Kelso is a good example of another investing vehicle designed to provide high income. But looking beneath the surface exposes some flaws that may keep it from reaching perfection in the years to come.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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