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 Franklin Resources
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 Franklin Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.2%||Fail|
|1-Year Revenue Growth > 12%||15.7%||Pass|
|Margins||Gross Margin > 35%||44.9%||Pass|
|Net Margin > 15%||26.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||23.0%||Pass|
|Current Ratio > 1.3||7.87||Pass|
|Opportunities||Return on Equity > 15%||21.3%||Pass|
|Valuation||Normalized P/E < 20||16.63||Pass|
|Dividends||Current Yield > 2%||0.9%||Fail|
|5-Year Dividend Growth > 10%||14.9%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Franklin Resources last year, the stock has kept its eight-point score. Healthy markets have boosted assets under management, which is a key element of success for a mutual fund manager.
Franklin Resources is the name behind the Franklin, Templeton, and Mutual Series fund families. With a wide variety of stock and bond funds, the company is fairly well diversified and hasn't suffered from an exodus of assets that more stock-centric firms have seen. Along with Legg Mason
The big question, though, is whether Franklin will move into the ETF realm. Already, mutual fund companies BlackRock
Boosting the company's tepid 1% dividend yield would be an obvious step toward perfection. But unless the bull market continues, revenue growth isn't likely to accelerate enough to give this stock a full 10-point score in the future.
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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