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 Ryland Group (NYSE: RYL ) 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 Ryland Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(28.5%)||Fail|
|1-Year Revenue Growth > 12%||(11.1%)||Fail|
|Margins||Gross Margin > 35%||15.7%||Fail|
|Net Margin > 15%||(5.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||180.6%||Fail|
|Current Ratio > 1.3||5.34||Pass|
|Opportunities||Return on Equity > 15%||(5.7%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0.7%||Fail|
|5-Year Dividend Growth > 10%||(24.2%)||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Ryland Group last year, the company hasn't been able to improve its one-point score. The housing industry remains in a slump, although some recent signs point to a possible recovery.
Homebuilder stocks have been a minefield of dashed hopes over the past several years. Many times, the housing market seems to be on the brink of coming back, only to swoon again into a deeper decline.
But Ryland and its peers are hopeful that positive results this time around will stick. Last month, Toll Brothers (NYSE: TOL ) reported its highest level of signed contracts in years, with backlogs rising 21% even though home deliveries fell slightly. That continued a trend we've seen lately across the industry, as both Hovnanian (NYSE: HOV ) and Standard Pacific (NYSE: SPF ) had reported big jumps in their backlogs. Yet for all of these companies, sales levels remain far below where they were during the housing boom, and revenue may never fully recover.
In its most recent quarterly results in January, Ryland managed to return to profitability, even though it fell short of analyst expectations. With new orders up 24% and closings rising 16% from the year-earlier quarter, Ryland has to hope that the trend continues when it releases first-quarter earnings later this month -- and that Beazer Homes (NYSE: BZH ) , which is a rival in some of Ryland's key markets, and other competitors don't snap up all the deals.
A rising housing market will lift all ships, and Ryland should benefit when an upturn finally comes. But until it does, Ryland isn't going to look anything like 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.
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