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 Interactive Brokers (NAS: IBKR) 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 Interactive Brokers.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.3%||Fail|
|1-Year Revenue Growth > 12%||32.1%||Pass|
|Margins||Gross Margin > 35%||77.4%||Pass|
|Net Margin > 15%||44.4%||Pass|
|Balance Sheet||Debt to Equity < 50%||6.0%||Pass|
|Current Ratio > 1.3||1.16||Fail|
|Opportunities||Return on Equity > 15%||11.3%||Fail|
|Valuation||Normalized P/E < 20||31.8*||Fail|
|Dividends||Current Yield > 2%||2.8%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Interactive Brokers started paying a dividend in May 2011. *Reflects trailing-12-month earnings figures. Total score = number of passes.
Since we looked at Interactive Brokers last year, the online broker has more than doubled its score. A big turnaround in sales over the past year combined with the debut of a dividend to give IB the extra points.
Interactive Brokers is one of many participants in the online brokerage space. Unlike better-known rivals Charles Schwab (NYS: SCHW) and TD AMERITRADE (NAS: AMTD) , among many others, Interactive Brokers has no qualms about aiming itself at high-volume traders rather than long-term investors. That strategy gives the company access to some of the most lucrative profit-producing customers in the business.
But Interactive Brokers also differs from its peers in that it also has an extensive market-making operation. Market-making brought in more than half of the company's revenue in the third quarter, and although it hasn't grown as quickly as its brokerage segment over the past year, it still represents an important part of IB's business.
Perhaps the biggest news, though, is Interactive Brokers' decision to pay a dividend. With a yield near 3%, the company beats not only Schwab, TD, and E*TRADE Financial (NAS: ETFC) but also broader-based financial companies such as Wells Fargo (NYS: WFC) and Bank of America (NYS: BAC) , both of which also offer discount brokerage services.
With a stock price that has struggled over the past year, Interactive Brokers definitely isn't perfect. But if more investors keep thinking that short-term trading is a better strategy than long-term investing, then Interactive Brokers is in a great spot to capitalize on that trend.
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.
Click here to add Interactive Brokers to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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 ."
Editor's note: A previous version of this article relied on erroneous data that failed to accurately reflect Interactive Brokers' corporate structure. The Fool regrets the error.
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Bank of America, Interactive Brokers Group, and Wells Fargo, and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Charles Schwab and Interactive Brokers Group. 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.