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 Standard Pacific
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 Standard Pacific.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(22.7%)||Fail|
|1-Year Revenue Growth > 12%||9.5%||Fail|
|Margins||Gross Margin > 35%||20.0%||Fail|
|Net Margin > 15%||0.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||215.6%||Fail|
|Current Ratio > 1.3||7.45||Pass|
|Opportunities||Return on Equity > 15%||1.1%||Fail|
|Valuation||Normalized P/E < 20||100.41||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Standard Pacific last year, the company hasn't been able to improve on its one-point score. But investors have bid up the shares more than 75% in the past year on hopes that the worst of the housing crisis is behind the company.
Standard Pacific has come a long way in the past four years. Although peers PulteGroup
But as bad as the bust was for Standard Pacific, the company has seen a pretty big recovery. Just as Hovnanian
The way ahead isn't totally clear for Standard Pacific. There a definite possibility that the housing market could suffer again if interest rates start to rise. At least for now, any chance of that happening seems a long way off. But while Toll Brothers
For Standard Pacific to keep improving, it needs to deliver what its stock price has already promised: lasting growth. If the company falls short for any reason at all, the stock could easily drop back into the doldrums, and it could be years before Standard Pacific even starts to move 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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended writing naked calls on Standard Pacific. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.