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 AIG
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 AIG.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (6.8%) | Fail |
| 1-Year Revenue Growth > 12% | (3.2%) | Fail | |
| Margins | Gross Margin > 35% | 19.7% | Fail |
| Net Margin > 15% | 8.2% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 85.6% | Fail |
| Current Ratio > 1.3 | 1.63 | Pass | |
| Opportunities | Return on Equity > 15% | 8.8% | Fail |
| Valuation | Normalized P/E < 20 | 27.87 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 1 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just a single point, AIG is almost as far from perfection as you can get. That shouldn't surprise anyone who remembers the insurance company's role in the financial crisis in 2008.
In September 2008, AIG was on the brink of collapse when the Federal Reserve agreed to provide an $85 billion credit facility to keep the insurer out of bankruptcy. In return, the federal government took warrants to buy a bit less than 80% of the company's shares. By using that money and an additional bailout it took later that year, AIG was able to repay counterparties including Goldman Sachs
During the worst of the market meltdown, the company's shares had fallen as much as 99% from their 2007 highs. But in early 2010, fund guru Bruce Berkowitz made a big investment in AIG, arguing that the worst was over for it and several other financial stocks, including Citigroup
More recently, though, shares have fallen back again as the government sold part of its stake in the insurer. As the government continues to exit from AIG in the future, the insurer's fate will increasingly depend on fundamentals. And although the company's financials look ugly, the scaled-down version of AIG will look a lot different from its past incarnation during its heyday.
AIG isn't a perfect stock, and it will never be the same. Whether it's a good investment at these levels depends on whether it can survive the lasting stigma of the bailouts it took -- and whether its remaining businesses can once again generate the profits that made the company such a fierce competitor for such a long time.
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.
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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 ."
