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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Hartford Financial Services Group (NYSE: HIG ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Hartford Financial.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.3%||fail|
|1-Year Revenue Growth > 12%||91%||pass|
|Margins||Gross Margin > 35%||24.3%||fail|
|Net Margin > 15%||2.9%||fail|
|Balance Sheet||Debt to Equity < 50%||37.6%||pass|
|Current Ratio > 1.3||9.60||pass|
|Opportunities||Return on Equity > 15%||4.5%||fail|
|Valuation||Normalized P/E < 20||13.02||pass|
|Dividends||Current Yield > 2%||0.8%||fail|
|5-Year Dividend Growth > 10%||(29.5%)||fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Hartford Financial's score of 4 leaves it far short of perfect. That may seem like a shock, given that the company has nearly doubled its revenue in the past year. But all that shows is just how big a hole the financial industry found itself in during the dark days following the market meltdown.
To put the past in perspective, Hartford lost $2.75 billion in 2008, with huge losses in excess of $10 billion from its equity securities trading portfolio. As a property and casualty insurer, it suffered sharper declines in earnings and investment trading results than life insurers Prudential Financial (NYSE: PRU ) and MetLife (NYSE: MET ) , and the company saw its shares fall more than 95% from the beginning of 2008 to mid-March 2009.
Now, Hartford is back, and it's profitable. Compared to fellow P&C insurer Travelers (NYSE: TRV ) , its margins and returns on equity are somewhat weak. But as long as the financial markets cooperate by keeping the financial markets on an even keel, the company's investment results should improve. And if it can stay on its upward trend, Hartford should eventually be able to restore its dividend to past levels, and shareholders could continue to see reasonable gains.
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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