Has Fortress Investment Become the Perfect Stock?

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 Fortress Investment (NYSE: FIG  ) 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 Fortress Investment.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(15%)

Fail

 

1-Year Revenue Growth > 12%

(17.9%)

Fail

Margins

Gross Margin > 35%

(2.3%)

Fail

 

Net Margin > 15%

(38.6%)

Fail

Balance Sheet

Debt to Equity < 50%

16.9%

Pass

 

Current Ratio > 1.3

2.61

Pass

Opportunities

Return on Equity > 15%

(58.4%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

5.1%

Pass

 

5-Year Dividend Growth > 10%

(15.5%)

Fail

       
 

Total Score

 

3 out of 9

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Fortress Investment last year, the company hasn't been able to improve on its three-point score. Weaker revenue offset the company's decision to initiate a dividend earlier this year, but the stock has managed to gain about 10% in the past year.

The private equity industry has been a big moneymaker, but not so much for the investors who bought shares of private-equity companies when they went public. Both Fortress and Blackstone Group (NYSE: BX  ) have performed abysmally since their respective 2007 IPOs, with many investors having noted just how perfect their timing was in coming to market just before the bottom fell out of the private-equity market.

Despite its stock's terrible long-term returns, Fortress has had some recent successes. For instance, its investment in RailAmerica (NYSE: RA  ) will produce a nice profit for the company, as private-equity rival and newly public Carlyle Group is joining with Bank of America (NYSE: BAC  ) to help finance Genesee & Wyoming's purchase of the regional railroad.

Fortress is also the majority owner of Nationstar Mortgage, which recently managed to pick up most of the assets of Residential Capital, the failed mortgage servicing unit of Ally Financial. Despite a run-in with Berkshire Hathaway (NYSE: BRK-B  ) , which tried to grab up the assets, Nationstar managed to hold onto the servicing rights. That pick-up should prove lucrative in the long run, although it comes with controversy over foreclosure practices.

However, it's essential to remember that these successes helped Fortress's fund clients, with only an indirect impact on Fortress itself and its shareholders. For Fortress to improve, it needs to see more investing successes like this, which would then boost interest in the company's private-equity funds and start building assets and revenue back up. Until that happens, though, Fortress could languish for quite a while.

Keep searching
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.

Private equity has been a tough call for shareholders, but it's even harder to understand the ins and outs of the banking industry. Get the help you need from the Fool's premium report on Bank of America, which reveals everything you need to know about the too-big-to-fail bank. You'll also get free updates for a year. Get your copy today.

Click here to add Fortress Investment to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway, Bank of America, and RailAmerica. Motley Fool newsletter services have recommended buying shares of Genesee & Wyoming and Berkshire Hathaway. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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