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 Cypress Sharpridge (NYSE: CYS ) 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 Cypress Sharpridge.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||68%||Pass|
|1-Year Revenue Growth > 12%||88.3%||Pass|
|Margins||Gross Margin > 35%||100%||Pass|
|Net Margin > 15%||69.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||553.9%||Fail|
|Current Ratio > 1.3||0.04||Fail|
|Opportunities||Return on Equity > 15%||10.6%||Fail|
|Valuation||Normalized P/E < 20||9.46||Pass|
|Dividends||Current Yield > 2%||19.4%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Cypress Sharpridge has not paid dividends throughout the five-year period. Total score = number of passes.
Cypress Sharpridge comes up with a good score of 6. The company sports one of the highest dividend yields in the market, thanks to its strategy of highly leveraged investments in mortgage securities.
Cypress Sharpridge is a mortgage REIT, investing in single-family residential mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. As a real estate investment trust, Cypress has to pay out 90% of its net income to shareholders in order to maintain its tax-favored status.
Many mortgage REITs, including Annaly Capital (NYSE: NLY ) , Chimera Investment (NYSE: CIM ) , and American Capital Agency (Nasdaq: AGNC ) , have been at or near the top of the dividend yield listings for some time. That's because low rates on borrowing, combined with a reasonably steep yield curve, have paid off for mortgage REITs. Yet eventually, when rates start to rise, the costs of their highly leveraged positions will start to rise, eating into income.
For now, though, Cypress Sharpridge has been milking every last penny out of the favorable rate environment. As long as you're prepared for what will happen when rates turn, then Cypress is worth a closer look.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.