Has NorthStar Realty Finance 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 NorthStar Realty Finance (NRF) 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 NorthStar Realty Finance.

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at NorthStar Realty Finance last year, the company has given back the two points it gained from 2010 to 2011. But that hasn't kept the stock's price from jumping more than 40% over the past year as dividend fever continues to run rampant across the stock market.

NorthStar Realty Finance is a real-estate investment trust that focuses on commercial real-estate debt and securities. The company uses the same leveraged model that traditional residential mortgage REITs Annaly Capital (NLY -0.94%) and American Capital Agency (AGNC -0.64%) use to produce their high dividend payouts, simply using commercial debt rather than residential to reap the rewards.

But the Federal Reserve's recent move to aim its quantitative easing efforts at the residential mortgage-backed securities market has led to an increase in interest for alternatives to residential mortgage REITs. With Annaly having made a move to buy out former spinoff Crexus Investment (NYSE: CXS), mortgage REIT managers may well seek out buyouts of NorthStar or peer RAIT Financial Trust (NYSE: RAS) as ways to diversify their business.

NorthStar has cashed in on the interest in its shares, doing a secondary offering of 25 million shares last week to raise more than $150 million. That sent the stock price down briefly, but shares have already recovered beyond the offering price.

For NorthStar to improve, it needs to use its secondary proceeds to build up more revenue. That'll be essential if the REIT wants to get closer to perfection in the years ahead.

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. 

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