Has Goldman Sachs 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 Goldman Sachs (NYSE: GS  ) 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 Goldman Sachs.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(7.9%)

Fail

 

1-Year Revenue Growth > 12%

(1.4%)

Fail

Margins

Gross Margin > 35%

92.8%

Pass

 

Net Margin > 15%

18.1%

Pass

Balance Sheet

Debt to Equity < 50%

636%

Fail

 

Current Ratio > 1.3

1.52

Pass

Opportunities

Return on Equity > 15%

7.6%

Fail

Valuation

Normalized P/E < 20

11.39

Pass

Dividends

Current Yield > 2%

1.7%

Fail

 

5-Year Dividend Growth > 10%

5.6%

Fail

       
 

Total Score

 

4 out of 10

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

Since we looked at Goldman Sachs last year, the company sustained its four-point score for the third year in a row. But the stock has soared 30% as prospects for the Wall Street giant have continued looking up.

Goldman's reputation took a huge hit during the financial crisis, as its much-publicized shorting of securities related to the housing market made it seem as though the company was betting against its clients. Yet four years after the crisis, Goldman's solid performance has helped it recover from much of its reputational damage. Moreover, scandals like JPMorgan Chase's (NYSE: JPM  ) London Whale trading episode have shifted some of the attention away from Goldman.

Part of what has helped Goldman is the fact that it is nimble enough to go where market trends take it. For instance, players throughout the industry have shifted away from the highly volatile world of investment banking, with Bank of America (NYSE: BAC  ) , Morgan Stanley (NYSE: MS  ) , and UBS (NYSE: UBS  ) all focusing more on wealth management, which is a much more stable business driven by fees on assets under management rather than trading profits. Goldman opened a sub-bank under its corporate umbrella for its wealthiest clients, trying to capitalize on that trend.

Still, after the election, Goldman likely faces more regulatory challenges ahead. Having spent almost $1 million through political action committees in an effort to elect Presidential candidate Mitt Romney, Goldman almost certainly saw the Republican contender as a better leader for Wall Street than President Obama.

In its most recent quarter, Goldman posted better-than-expected results, based largely on success from its Institutional Client Services division. Underwriting and internal investing for its own account played secondary roles.

For Goldman to improve, it needs to keep up its efforts to increase its dividend and aim on driving revenue growth through stickier business like asset management. If it can do so, Goldman's stock has plenty of room to rise.

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.

Despite Goldman's recovery, Wall Street's attention remains squarely on Bank of America. But is B of A still a buy after its huge run-up? To learn more about the most talked-about bank out there, check out our in-depth company report on Bank of America. It details the bank's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

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


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