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 Aetna
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 Aetna.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 7.9% | Fail |
| 1-Year Revenue Growth > 12% | (2.2%) | Fail | |
| Margins | Gross Margin > 35% | 28.4% | Fail |
| Net Margin > 15% | 5.3% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 40.1% | Pass |
| Current Ratio > 1.3 | 0.75 | Fail | |
| Opportunities | Return on Equity > 15% | 17.8% | Pass |
| Valuation | Normalized P/E < 20 | 10.42 | Pass |
| Dividends | Current Yield > 2% | 1.4% | Fail |
| 5-Year Dividend Growth > 10% | 56.9% | Pass | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just four points, Aetna doesn't insure financial success for shareholders. But the health insurer has an attractive valuation despite having seen significant share appreciation in the past year.
Health-insurance stocks generally have performed very well recently. The combination of investors wanting to turn more defensive with their stock portfolios after a long rally along with increasing comfort about health-care reform vaulted Humana
But that doesn't mean they don't face challenges. Everyone still wants lower health-care costs, and that will pressure Aetna's margins indefinitely. The interesting question is whether that pressure will lead to consolidation within the industry. Following the recent merger announcement from Express Scripts
In particular, Aetna and WellPoint
Aetna isn't a perfect stock, and it isn't likely to become one until there's more clarity on health-care reform. To be successful over the long run, Aetna will need to lead its industry forward to handle the ever-changing health-care needs of its policyholders.
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."
