Is Universal Insurance the Perfect Stock?

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 Universal Insurance Holdings (AMEX: UVE  ) 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 Universal Insurance.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 73.7% Pass
  1-Year Revenue Growth > 12% 15.7% Pass
Margins Gross Margin > 35% 48.6% Pass
  Net Margin > 15% 12.9% Fail
Balance Sheet Debt to Equity < 50% 34.8% Pass
  Current Ratio > 1.3 1.55 Pass
Opportunities Return on Equity > 15% 22.1% Pass
Valuation Normalized P/E < 20 7.41 Pass
Dividends Current Yield > 2% 7.3% Pass
  5-Year Dividend Growth > 10% 10.7%* Pass
       
  Total Score   9 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
*3.5-year growth rate.

Universal Insurance reaches near-perfection with a score of 9. That's a surprise given the trouble the financial industry has had in recent years.

Universal is a tiny company that primarily sells homeowners' insurance. It's a leader in Florida and has expanded to include the Carolinas and Hawaii as well.

The company's small size gives it a huge growth edge over more mature competitors. Fellow insurers Allstate (NYSE: ALL  ) and Chubb (NYSE: CB  ) haven't seen any revenue growth over the past five years. Yet despite slow growth and a much less attractive dividend, both of those stocks trade at more expensive valuations than Universal.

At the same time, Universal is riskier than more geographically diverse insurers. Unlike Travelers (NYSE: TRV  ) and Hartford Financial (NYSE: HIG  ) , which write policies all over the country, Universal is particularly exposed to hurricane-prone Florida. Although expansion will remedy that in part, a bad year could put a big hit on profits.

Still, for a small-cap stock, Universal is doing everything right at the moment. It's hard to find a stock that's closer to perfect.

Keep searching
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 Universal Insurance to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 04, 2011, at 11:17 AM, SBaus wrote:

    I have owned UVE, real money, for about 2 years, my cost is in the 3.70 range, so I have done well with it. While I agree with most of what was said, I think the risk was downplayed. When, not if, a bad storm hits Florida, it could be the whole company, not just profits that are at risk.

  • Report this Comment On February 04, 2011, at 12:51 PM, paul282000 wrote:

    I have owned UVE for a while now, it is really starting to take off. It will continue when it releases it's quarterly numbers next month. It's 10 cent quarterly cash dividend also makes it a great stock. 9 out of 10 is an excellant score for a small upcoming company.

  • Report this Comment On February 07, 2011, at 9:46 PM, AmateurTraderGuy wrote:

    owned UVE real money for over 2.5 years, priced in at 3.10 a piece; doing awesome, glad I held on. Also expanded into massachusetts, and I believe north carolina as well. It will be intersting to see how many new policies are being issued in the new markets theyve expanded to, can't wait to see those numbers

  • Report this Comment On February 16, 2011, at 4:24 PM, Cstrom wrote:

    I have also owned UVE for several years but I have to disagree with the first posters assessment that the whole company is at risk from a hurricane. UVE has to it's determent (lower earnings) bought large amounts of reinsurance to protect against a devastating storm. They have lost profit due to storms in the past but they have never been at risk as a ongoing business because of the protection they purchase. I'm fine with the loss to earning for the protection and it's hard to beat the dividend and growth story here. I road it up from high 1's and sold quite a bit in the 6 range and got back in recently in the 4 range.

  • Report this Comment On June 06, 2011, at 5:14 PM, Handworn wrote:

    What concerns me about UVE is the fact that their combined ratio is not and has not recently been under 100, meaning that their insurance business itself is unprofitable. Looks to me as though their profitability has come almost entirely from their investments using float. Which is not to say it's not a great investment-- it has more in investments per share alone than price per share-- but still, I wish they would focus more on getting their expense ratio down.

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