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 Genworth Financial (NYSE: GNW ) 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 Genworth Financial.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.2%)||Fail|
|1-Year Revenue Growth > 12%||4.9%||Fail|
|Margins||Gross Margin > 35%||5.6%||Fail|
|Net Margin > 15%||0.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||77.6%||Fail|
|Current Ratio > 1.3||1.70||Pass|
|Opportunities||Return on Equity > 15%||1.3%||Fail|
|Valuation||Normalized P/E < 20||68.87||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||1 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just a single point, Genworth Financial is about as far from perfection as you can get. The financial services company has faced a number of unique challenges on top of the general problems that the entire financial industry has had to deal with since the market meltdown two and a half years ago.
On the surface, Genworth looks like it has a diversified business. It sells annuities and insurance products to consumers, as well as providing financial planning assistance both within the U.S. and around the world. At the same time, the company also provided mortgage insurance to help borrowers qualify for mortgage loans from lenders like Fannie Mae and Freddie Mac.
But as it turned out, Genworth was in the wrong place at the wrong time. On one hand, the company faced significant losses on several consumer-targeted financial products. Genworth recently gave up selling variable annuities late last year because sales were down substantially. At the same time, the company has had to join Manulife Financial (NYSE: MFC ) and its John Hancock division in requesting big premium increases for long-term care policies -- policies that MetLife (NYSE: MET ) had to stop writing entirely.
At the same time, the mortgage insurance business has been a disaster. Although monoline insurers PMI Group (NYSE: PMI ) , Radian Group (NYSE: RDN ) , and MGIC Investment (NYSE: MTG ) have the most to lose from losses on private mortgage insurance, Genworth can't really afford another financial problem in a different segment of its business right now.
Genworth is hoping that the worst is over for its ailing businesses. But until the company can demonstrate a true turnaround, you should look elsewhere to seek a perfect stock.
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 Genworth Financial 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."