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 BlackRock (NYSE: BLK ) 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 BlackRock.
What We Want to See
Pass or Fail?
|Growth||Five-year annual revenue growth > 15%||27.3%||Pass|
|One-year revenue growth > 12%||1.7%||Fail|
|Margins||Gross margin > 35%||53.4%||Pass|
|Net margin > 15%||25.9%||Pass|
|Balance Sheet||Debt to equity < 50%||22.4%*||Pass|
|Current ratio > 1.3||10.31*||Pass|
|Opportunities||Return on equity > 15%||9%||Fail|
|Valuation||Normalized P/E < 20||15.86||Pass|
|Dividends||Current yield > 2%||3.5%||Pass|
|Five-year dividend growth > 10%||23.9%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Debt-to-equity ratio and current ratio exclude collateral liabilities under securities lending agreements.
Since we looked at BlackRock last year, the company has seen its score fall by a point. A slowdown in revenue growth over the past year was responsible for the score loss, but the stock's roughly 10% fall is probably of more concern to investors.
BlackRock has established itself as the king of the exchange-traded fund industry, with its iShares funds holding a commanding lead in assets under management over nearest competitors State Street (NYSE: STT ) and Vanguard. BlackRock's funds have been instrumental in turning ETFs into a trillion-dollar industry.
But with ETFs, innovations come from all directions. WisdomTree Investments (Nasdaq: WETF ) has grown strongly over the past five years, with new ETFs that bring a completely different spin to the index-dominated industry. WisdomTree's distribution deal with E*Trade (Nasdaq: ETFC ) to offer commission-free ETFs to E*Trade customers could mean even more growth for the fledgling ETF manager. Meanwhile, Pimco has taken big strides with its actively managed PIMCO Total Return ETF (NYSE: BOND ) , allowing investors to tap into bond guru Bill Gross and his insights. How BlackRock responds to those challenges will be important in determining its success for years to come.
Nevertheless, BlackRock's commanding position appears unassailable, at least for the moment. With the company buying out a big part of Barclays' remaining stake in the company that resulted from the iShares sale, BlackRock looks poised to stay atop the fast-growing ETF industry for quite a while.
No stock is a sure thing, but some stocks are a lot closer to perfection 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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