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 Standard Pacific (NYSE: SPF ) 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 Standard Pacific.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(22.7%)||Fail|
|1-Year Revenue Growth > 12%||9.5%||Fail|
|Margins||Gross Margin > 35%||20.0%||Fail|
|Net Margin > 15%||0.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||215.6%||Fail|
|Current Ratio > 1.3||7.45||Pass|
|Opportunities||Return on Equity > 15%||1.1%||Fail|
|Valuation||Normalized P/E < 20||100.41||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Standard Pacific last year, the company hasn't been able to improve on its one-point score. But investors have bid up the shares more than 75% in the past year on hopes that the worst of the housing crisis is behind the company.
Standard Pacific has come a long way in the past four years. Although peers PulteGroup (NYSE: PHM ) and KB Home (NYSE: KBH ) suffered huge drops in sales, Standard Pacific came extremely close to the brink during the financial crisis.
But as bad as the bust was for Standard Pacific, the company has seen a pretty big recovery. Just as Hovnanian (NYSE: HOV ) has seen stronger order volume, Standard Pacific has put in some impressive numbers so far this year. In fact, with revenue growth back and increases in orders, completed sales, and backlogs, Standard Pacific looks like it may be turning the corner at long last.
The way ahead isn't totally clear for Standard Pacific. There a definite possibility that the housing market could suffer again if interest rates start to rise. At least for now, any chance of that happening seems a long way off. But while Toll Brothers (NYSE: TOL ) caters to high-end buyers and therefore arguably has less exposure to higher rates because its buyers can afford what it, Standard Pacific is arguably more exposed, especially with its focus in the California market.
For Standard Pacific to keep improving, it needs to deliver what its stock price has already promised: lasting growth. If the company falls short for any reason at all, the stock could easily drop back into the doldrums, and it could be years before Standard Pacific even starts to move toward perfection.
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.
Standard Pacific isn't perfect, but we've got some other ideas for you to take a look at. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Standard Pacific to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.