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 Janus Capital (NYSE: JNS ) 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 Janus Capital.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.0%||Fail|
|1-Year Revenue Growth > 12%||(3.3%)||Fail|
|Margins||Gross Margin > 35%||70.0%||Pass|
|Net Margin > 15%||14.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||41.5%||Pass|
|Current Ratio > 1.3||5.62||Pass|
|Opportunities||Return on Equity > 15%||11.4%||Fail|
|Valuation||Normalized P/E < 20||10.11||Pass|
|Dividends||Current Yield > 2%||2.2%||Pass|
|5-Year Dividend Growth > 10%||30.3%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Janus Capital last year, the fund company has picked up a point. A huge increase in the company's dividend is responsible for the rise, although a slight drop in revenue raises some concerns.
Like many of its peers, Janus relies on a strong stock market to keep its customers investing their assets in its funds. Although Franklin Resources (NYSE: BEN ) and AllianceBernstein (NYSE: AB ) have a well-diversified set of funds that include both stock- and bond-oriented offerings, Janus' stock focus -- which served it well during better times for the market -- has hurt the company lately, as mainstream investors continue to fear stocks despite a huge bull run since the financial crisis three years ago.
Shareholders aren't happy with the weak performance Janus has put in lately. Last year, the company only got 40% support for its executive pay policy, and CEO Richard Weil had to take a pay cut in order to appease investors.
One question facing Janus is whether it will try to make a foray into the exchange-traded-fund market. ETFs have taken off in popularity, and with Pimco having energized the actively managed ETF market with its recent new fund, an avalanche of new ETFs may be coming. Janus won't be able to reap the success that ETF specialists BlackRock (NYSE: BLK ) and State Street (NYSE: STT ) have with their iShares and SPDR ETFs, but an active ETF of its own could help revive its flagging revenue.
For Janus to keep improving, it needs to identify realistic ways to boost its asset base. Whether it comes from traditional mutual funds, ETFs, or some other quarter, Janus could see a big rebound if mainstream investors ever feel confident enough to come back into the stock market en masse.
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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