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 Chemed (NYSE: CHE ) 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 Chemed.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.4%||Fail|
|1-Year Revenue Growth > 12%||7.6%||Fail|
|Margins||Gross Margin > 35%||28.7%||Fail|
|Net Margin > 15%||6.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||38.7%||Pass|
|Current Ratio > 1.3||1.05||Fail|
|Opportunities||Return on Equity > 15%||17.3%||Pass|
|Valuation||Normalized P/E < 20||13.02||Pass|
|Dividends||Current Yield > 2%||1.3%||Fail|
|5-Year Dividend Growth > 10%||19.3%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of four, Chemed falls well short of the top of our scale. The company has faced some scary allegations lately, but those fears have pushed valuations down to very attractive levels.
Chemed is a bit of an odd duck as companies go. Of Chemed's businesses, the typical person is probably most familiar with its Roto-Rooter plumbing and drain repair segment. But the company also runs facilities that provide hospice care to dying patients. That has been a profitable combination, and earlier this year, Chemed was able to boost its dividend by 14% to its current level.
Health care in particular is a tough place to invest, especially in recent times. Concerns about changing health-care regulations and reimbursement practices have made home health stocks like Amedisys (Nasdaq: AMED ) , Gentiva Health (Nasdaq: GTIV ) , and Almost Family (Nasdaq: AFAM ) veritable minefields for shareholders. While not strictly comparable, Chemed is also vulnerable to the same trends.
Earlier this week, Chemed shares dropped more than 10% after a whistleblowing former manager sued the company with allegations of conspiracy involving Chemed's hospice care business. With the Department of Justice also investigating suspicions that Chemed unit Vitas allegedly defrauded Medicare and Medicaid, investors are understandably edgy.
For Chemed to keep improving, it needs to get out from under the clouds of regulatory scrutiny and reestablish itself as a strong business. Fortunately, the stock has a reasonable valuation right now, so if it can restore its reputation, Chemed could well get back toward perfection in the years ahead -- if it's given enough time to do so.
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."