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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 Allstate (NYSE: ALL ) 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 Allstate.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(2.3%)||Fail|
|1-Year Revenue Growth > 12%||(1.9%)||Fail|
|Margins||Gross Margin > 35%||15.3%||Fail|
|Net Margin > 15%||3.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||33.9%||Pass|
|Current Ratio > 1.3||0.86||Fail|
|Opportunities||Return on Equity > 15%||5.2%||Fail|
|Valuation||Normalized P/E < 20||23.98||Fail|
|Dividends||Current Yield > 2%||2.7%||Pass|
|5-Year Dividend Growth > 10%||(9.0%)||Fail|
|Total Score||2 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of just 2, Allstate isn't close to perfection. In fact, the insurance company has run into the perfect storm of negative hits to its business recently.
Allstate has run into some big problems recently. Throughout the property and casualty industry, insurers Travelers (NYSE: TRV ) and Chubb (NYSE: CB ) have missed analysts' earnings expectations because of major storms in the Midwest and Southwest during the last three months of 2010. Allstate also fell prey to those natural disasters.
But bad weather isn't the only thing hurting Allstate. Its underwriting decisions took a hit as the company paid out a larger percentage of its premium income in claims than it did last year, with auto claims particularly seeing a big rise. Unlike smaller competitors like Universal Insurance (NYSE: UVE ) , Allstate's national scope doesn't allow it to narrowly focus on particular market segments that have the best profit potential.
Allstate's dividend is attractive, far outpacing that of Progressive (NYSE: PGR ) and edging out Travelers and Chubb, but the company slashed it by half in 2008 and has only made a single increase since. If the insurer's underwriting experience continues to get worse, the payout could shrink further. All in all, Allstate may leave you in good hands, but it isn't the perfect stock right now.
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 Allstate 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.