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 Amerigroup (NYSE: AGP ) 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 Amerigroup.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||19.2%||Pass|
|1-Year Revenue Growth > 12%||10.9%||Fail|
|Margins||Gross Margin > 35%||18.5%||Fail|
|Net Margin > 15%||4.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||19.9%||Pass|
|Current Ratio > 1.3||0.94||Fail|
|Opportunities||Return on Equity > 15%||23.9%||Pass|
|Valuation||Normalized P/E < 20||9.14||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Amerigroup doesn't look all that healthy with a score of only 4. The provider of managed health care has had to deal with the uncertainties of health-care reform, and now that a debt ceiling deal has gotten through, future cuts could be devastating.
Amerigroup is facing headwinds from all quarters right now. With states facing budget crises of their own, they're looking for ways to cut back on Medicaid expenditures. In Amerigroup's case, the state of Georgia adjusted premiums following the discovery that the insurer had double-billed for some of its services, forcing the insurer to take a one-time charge that led to a big drop-off in quarterly profits. The move has had a ripple effect across the industry, with WellCare (NYSE: WCG ) and other Medicaid providers falling as well.
The bigger issue may be on the federal side, though. Medicare announced an 11% reduction in rates for skilled nursing facilities, taking away any hope that a modest funding increase might occur. That's hit not only Amerigroup but also big providers like UnitedHealth (NYSE: UNH ) , Humana (NYSE: HUM ) , and WellPoint (NYSE: WLP ) , all of which could see less money coming from Medicare as a result of the moves.
Whether Amerigroup can climb back toward perfection depends largely on factors beyond its control. Until a true path for health care in the U.S. gets a whole lot clearer, it'll be tough for Amerigroup to become a perfect stock for investors.
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."