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 MetLife (NYSE: MET ) 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 MetLife.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.0%||Fail|
|1-Year Revenue Growth > 12%||27.3%||Pass|
|Margins||Gross Margin > 35%||32.8%||Fail|
|Net Margin > 15%||5.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||133.2%||Fail|
|Current Ratio > 1.3||1.67||Pass|
|Opportunities||Return on Equity > 15%||6.9%||Fail|
|Valuation||Normalized P/E < 20||14.63||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||7.3%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of just 3, MetLife hasn't exactly paid off with perfection for investors. The insurance company is still suffering from investors' disdain for financial stocks generally.
As its name suggests, MetLife offers a variety of life insurance products, including term and universal life policies, annuities, and employee benefits programs. But what you may not know is that MetLife is also a big player in other financial services. In particular, MetLife is the largest lender for reverse mortgages, now that Wells Fargo (NYSE: WFC ) and Bank of America (NYSE: BAC ) have decided to exit the industry.
Unfortunately for MetLife, a tough period of catastrophic losses has caused some temporary setbacks. Unlike Aflac (NYSE: AFL ) and Prudential (NYSE: PRU ) , which only covered health-care costs, the Japanese earthquake and tsunami will result in substantial property damage claims against MetLife.
However, the company has rebounded since the financial crisis. Two years ago, it had to increase fees on guaranteed annuity products due to the market meltdown. But with the stock market recovering, MetLife is solidly profitable.
With substantial debt, anemic long-term growth, and mediocre returns on equity, MetLife will never be the perfect stock. Unless fortunes turn around for MetLife, investors seeking perfection would be better off looking to its competitors.
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."