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 EZCORP (Nasdaq: EZPW ) 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 EZCORP.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||23.1%||Pass|
|1-Year Revenue Growth > 12%||19.3%||Pass|
|Margins||Gross Margin > 35%||61.0%||Pass|
|Net Margin > 15%||13.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||3.4%||Pass|
|Current Ratio > 1.3||5.18||Pass|
|Opportunities||Return on Equity > 15%||20.1%||Pass|
|Valuation||Normalized P/E < 20||16.60||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With seven points, EZCORP puts many more conventional lenders to shame. The company isn't in a well-loved industry, but few can argue that it's not a profitable one.
EZCORP operates a chain of pawn shops and short-term payday loan stores throughout North America. From time to time, the payday loan industry comes under fire for the fees it charges to customers, which, when translated into an annual percentage rate, appear to give lenders usurious amounts of income.
Last year, federal lawmakers targeted payday lenders like EZCORP. With proposed limits on the number of payday loans customers could take, as well as rate and fee caps and oversight by the newly created Consumer Financial Protection Bureau, the entire business could have disappeared. Lately, though, that pressure seems to have diminished, as the CFPB has turned its attention to weightier matters, like big banks.
EZCORP has no shortage of competitors. But its margins and returns on equity greatly exceed those of Dollar Financial (Nasdaq: DLLR ) , Cash America International (NYSE: CSH ) , and Advance America (NYSE: AEA ) . Moreover, in the past five years, EZCORP has grown revenue faster than any of those four competitors, as well as First Cash Financial (Nasdaq: FCFS ) .
As long as EZCORP has a base of customers whom banks don't serve, it will have the potential to thrive. Despite legislative threats, EZCORP and its peers have gotten through tough times before, and if they can do so again, EZCORP could stay fairly close to perfection for the foreseeable future.
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."