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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(2.0%)||Fail|
|1-Year Revenue Growth > 12%||(21.8%)||Fail|
|Margins||Gross Margin > 35%||92.1%||Pass|
|Net Margin > 15%||18.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||687%||Fail|
|Current Ratio > 1.3||1.47||Pass|
|Opportunities||Return on Equity > 15%||7.9%||Fail|
|Valuation||Normalized P/E < 20||9.38||Pass|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||0%||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 Wall Street giant has kept its score of four. But the company has seen some troubling trends arise more recently that should have shareholders concerned.
Although Goldman itself just started trading as a public company just over a decade ago, it has a long and storied history, having underwritten the initial public offerings of companies ranging from venerable Ford (NYSE: F ) to tech trailblazer Microsoft. But of course, most of that long history got washed away during the financial crisis, replaced instead with public scorn after it took a bailout despite posting big profits and handing out large bonuses to employees.
But recently, Goldman has seen a renewal of troubles. In its most recent quarter, the company reported a loss, as merger and acquisition activity fell. Goldman also took a huge $2.5 billion revenue hit on its own proprietary trading. That's not unique to Goldman -- Morgan Stanley (NYSE: MS ) , JPMorgan Chase (NYSE: JPM ) , and Bank of America (NYSE: BAC ) also saw fairly weak quarters. But even after two years of recovery, Goldman and its peers can't afford to let their guard down at this point.
Even worse than the financial damage is the reputational risk with Goldman. After years of dealing with SEC and Congressional investigations, the Wall Street firm may never get past its links to the market meltdown.
For Goldman to get past this episode, the world needs to accommodate the company by having its economy stabilize. As long as the U.S. economy in particular remains bumpy, people will blame Goldman Sachs -- and the stock won't start moving back toward perfection.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."