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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 Fortress Investment Group (NYSE: FIG ) 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 Fortress Investment Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(7.1%)||Fail|
|1-Year Revenue Growth > 12%||46.1%||Pass|
|Margins||Gross Margin > 35%||23%||Fail|
|Net Margin > 15%||(31.1%)||Fail|
|Balance Sheet||Debt to Equity < 50%||26.6%||Pass|
|Current Ratio > 1.3||2.67||Pass|
|Opportunities||Return on Equity > 15%||(92.2%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
With only three points, Fortress doesn't inspire much confidence. The private equity firm has seen some big ups and downs since it went public back in 2007, and right now, it's hoping for some help to pull it up off the mat.
Fortress was one of the hottest IPOs four years ago, as it gave investors a taste of a hot area of the market: private equity. After a five-year bull market that gave private equity firms big profits, the IPO seemed to open the door for ordinary investors to take advantage. Moreover, it led to other big players in the industry following suit, including Blackstone (NYSE: BX ) and Och-Ziff Capital Management (NYSE: OZM ) .
In hindsight, that timing was terrible, as the stock market started moving downward almost immediately thereafter, culminating in the financial crisis and big bear market of 2008 and early 2009. Once funds dried up, Fortress followed peers Harris & Harris (Nasdaq: TINY ) and KKR Financial (NYSE: KFN ) down. They since recovered some of that ground in the ensuing recovery rally, which also spawned the IPO of Kohlberg Kravis Roberts (NYSE: KKR ) . But the latest market swoon has taken another big bite out of shares.
Yesterday, the company's shares rose 9% after a blog post pointed out the big losses in private equity company stocks lately. That seems like a dubious catalyst for a big gain, yet volatile markets often present conundrums like this.
Private equity needs healthy markets, and right now, investors lack the confidence they need to support private equity firms. Until the economy gets a whole lot clearer, Fortress isn't going to become a perfect stock.
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.
Click here to add Fortress Investment Group to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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.