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%||22.4%||Pass|
|1-Year Revenue Growth > 12%||17.2%||Pass|
|Margins||Gross Margin > 35%||62.1%||Pass|
|Net Margin > 15%||14.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||16.8%||Pass|
|Current Ratio > 1.3||3.61||Pass|
|Opportunities||Return on Equity > 15%||20.2%||Pass|
|Valuation||Normalized P/E < 20||9.02||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at EZCORP last year, the company has kept its seven-point score. But the shares have plunged by a third as threats from regulators have taken their toll on the payday lending industry.
The entire payday lending industry has gone through a lot of turmoil in recent years. With the new Consumer Financial Protection Bureau looking over EZCORP and its competitors, many investors expected much lower profits from that side of the business. It didn't keep Grupo Elektra from buying out Advance America earlier this year, but it does still leave the remaining players with a lot of uncertainty.
In response, many industry players have emphasized other businesses. DFC Global (Nasdaq: DLLR ) now sports prepaid cards, while Cash America (NYSE: CSH ) and First Cash Financial (Nasdaq: FCFS ) have played up their pawn stores as discount retail opportunities. That's also one route EZCORP has taken with its own strong stable of pawn shops.
But part of EZCORP's troubles stem from the decline in gold prices. As gold has fallen, fewer customers are pawning their gold, instead using regular merchandise that is more difficult for EZCORP to convert to cash and which typically fetches lower margins. That forced the company to cut its 2012 earnings outlook back in April.
But even with those challenges, the company is doing a good job of expanding internationally. With stakes in Mexico's Crediamigo and U.K.-based Cash Genie, EZCORP is looking to diversify away from the risks of U.S. regulation.
For EZCORP to improve, it needs to keep boosting margins and then think about whether it can afford a dividend. For now, the company may be better off focusing on its expansion plans rather than returning valuable capital to shareholders.
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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