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 BGC Partners (Nasdaq: BGCP ) 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 BGC Partners.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.1%||Fail|
|1-Year Revenue Growth > 12%||9.3%||Fail|
|Margins||Gross Margin > 35%||98.2%||Pass|
|Net Margin > 15%||1.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||69.0%||Fail|
|Current Ratio > 1.3||1.90||Pass|
|Opportunities||Return on Equity > 15%||8.3%||Fail|
|Valuation||Normalized P/E < 20||20.74||Fail|
|Dividends||Current Yield > 2%||10.1%||Pass|
|5-Year Dividend Growth > 10%||8.0%*||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *3.5-year growth rate.
With only three points, BGC Partners still has some work to do. The company operates in an interesting niche that could become increasingly important as financial regulation makes further inroads in brokerage industry.
BGC Partners provides a wide range of services to investment brokers, ranging from marketplaces for various assets to back-office services for brokerage companies and trading platforms for professionals. Despite its name, the company is a corporation rather than a partnership and therefore pays regular dividends rather than partnership distributions.
What makes BGC stand out from its peers is its dividend. In the inter-dealer broker business, rival GFI Group (NYSE: GFIG ) pays an attractive 6% dividend based on its provision of trading products like electronically traded swaps. But BGC's major competitors in providing real estate services -- Jones Lang LaSalle (NYSE: JLL ) and CBRE Group (NYSE: CBG ) -- don't pay significant dividends at all. Furthermore, with BGC having bought out Grubb & Ellis recently, those two competitors could see increasingly tough challenges from BGC.
BGC is positioning itself for a commercial real estate boom. If it comes -- and the company manages to outpace CBRE and Jones Lang Lasalle -- then the results could push the company a lot closer to perfection in the years ahead. Meanwhile, a 10% dividend yield plus a 37% employee insider stake in the company make BGC an interesting play for income-hungry investors.
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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