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 General Growth Properties (NYSE: GGP ) 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 General Growth Properties.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||(3.3%)||Fail|
|1-year revenue growth > 12%||7.9%||Fail|
|Margins||Gross margin > 35%||63.9%||Pass|
|Net margin > 15%||(15.1%)||Fail|
|Balance sheet||Debt to equity < 50%||197.8%||Fail|
|Current ratio > 1.3||0.34||Fail|
|Opportunities||Return on equity > 15%||(4.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||(26%)||Fail|
|Total score||2 out of 9|
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
Since we looked at General Growth Properties last year, the company has lost a point. A drop in current ratio is to blame for the move, but investors won't complain about its 35% rise over the past year.
General Growth used to be a much more highly diversified real estate investment trust. But following a stint in bankruptcy, the company spun off some of its prime assets into Howard Hughes Corp. (NYSE: HHC ) back in 2010. General Growth then did a similar spinoff late last year of its Rouse Properties (NYSE: RSE ) subsidiary, which owns a portfolio of regional malls across the country.
What that leaves General Growth with is a set of retail and other rental properties -- primarily regional malls -- in the U.S., as well as some assets in Brazil. After the spinoffs and other asset divestitures, some investors are bullish on the company's prospects, given its refocusing on core assets and overall improvement in the real estate environment.
One interesting area where the company is making big moves is in mall anchor-store real estate. Earlier this year, Sears Holdings (Nasdaq: SHLD ) announced it would sell 11 stores to General Growth for $270 million. Sears will get much-needed cash from the move, while General Growth ends up with some premium retail space, including a highly valued location in Hawaii. That's important as the REIT faces competition from Simon Property Group (NYSE: SPG ) and other more specialized REIT rivals.
For General Growth to keep improving, it needs to ramp up its growth more quickly and try to focus on becoming profitable. That may require a further turn in the real estate market, but when it comes, General Growth could see a lot of upside.
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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EDITOR'S NOTE: A previous version of this article incorrectly attributed ownership of master-planned communities to General Growth. Howard Hughes Corp. actually owns those assets. The Fool regrets the error.