Every investor would love to stumble upon the perfect stock.
But will you ever really find a stock that provides
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
) 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:
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.
Higher sales mean nothing if a company can't produce profits
from them. Strong margins ensure that company can turn revenue
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
Return on equity helps measure how well a company is finding
opportunities to turn its resources into profitable business
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.
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
With those factors in mind, let's take a closer look at
What We Want to See
Pass or Fail?
||5-Year Annual Revenue Growth > 15%
||1-Year Revenue Growth > 12%
||Gross Margin > 35%
||Net Margin > 15%
||Debt to Equity < 50%
||Current Ratio > 1.3
||Return on Equity > 15%
||Normalized P/E < 20
||Current Yield > 2%
||5-Year Dividend Growth > 10%
||7 out of 10
Source: S&P Capital IQ. Total score = number of
we looked at Discover Financial last year
, the company has kept the same seven-point score. The company's
return on equity has gone way up as provisions for loan losses
have fallen sharply in the past year, reflecting the increasing
health in the financial sector.
Discover has always been a niche player
in the credit card industry, with its introduction more than two
decades ago as a direct challenge to
) and their dominant card networks. But whereas both Visa and
MasterCard sought only to provide the conduit for credit-based
transactions, Discover has a payment network
issues its own cards. That boosts Discover's profit
opportunities, but it also introduces credit risk that MasterCard
and Visa lay off on issuing banks.
Discover isn't only about credit cards
. The company bought
) student loan unit last year, and the company also has a banking
division that has contributed to its growth and is looking to
enter the residential mortgage market in the near future.
Moreover, just like fellow network/issuer
) , Discover is trying to get into the mobile payment business,
which could be a key driver of business growth.
Discover has seen a big upturn in its
. In its most recent quarter, profits jumped 36% and volume rose
7%, even as the company's delinquencies dropped to an all-time
low. In particular, Discover has done a good job choosing
customers with reasonably high credit quality, which will
hopefully keep future payment problems to a minimum.
For Discover to keep improving, it needs to get its debt under
control and start aiming to raise its dividend. If the economy
keeps recovering, then Discover could easily find itself pushing
toward perfection in the years ahead.
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.
Discover Financial isn't the perfect stock, but we've got some
ideas you may like better. Let me invite you to learn about three
smart long-term stock plays in the Fool's latest special report.
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to add Discover Financial to My Watchlist, which can find
all of our Foolish analysis on it and all your other
Fool contributor Dan Caplinger doesn't own shares of the
companies mentioned in this article. The Motley Fool owns shares
of MasterCard and Citigroup. Motley Fool newsletter services have
recommended buying shares of Visa and writing a covered strangle
position in American Express. 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
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