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 Career Education (Nasdaq: CECO ) 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 Career Education.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.5%||Fail|
|1-Year Revenue Growth > 12%||(3.4%)||Fail|
|Margins||Gross Margin > 35%||73.5%||Pass|
|Net Margin > 15%||7.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.1%||Pass|
|Current Ratio > 1.3||1.49||Pass|
|Opportunities||Return on Equity > 15%||16.7%||Pass|
|Valuation||Normalized P/E < 20||3.04||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only five points, Career Education doesn't entirely pass this test. The for-profit education company has seen huge amounts of controversy over the past year or so, and Career Education in particular has fared far worse than many of its industry peers.
One problem has affected the entire for-profit education industry: controversy over the poor student-loan repayment rates that for-profit schools have. The Government Accountability Office found evidence of fraud and deceptive claims in for-profit school recruitment. In response, the federal government threatened earlier this year to take away for-profit school eligibility for subsidized student loans.
But when the Department of Education's regulations came out in June, its final versions weren't as harsh as the draft rules had been. That led to a big comeback for Strayer Education (Nasdaq: STRA ) and Corinthian Colleges (Nasdaq: COCO ) , which had been especially concerned about the potential impact of losing student loans. Now, the companies apparently have until 2015 to solve their problems.
That didn't solve all of the problems that Career Education faced. In late July, a court decided that schools can't pay recruiters enrollment-based incentives, and recruiters can't use deceptive information to prospective students. That killed the rally for small players Bridgepoint Education (NYSE: BPI ) and Career Education, as it affirmed the general negative sentiment about their business models.
Last week, Career Education had a Wall Street analyst downgrade its stock. The move from Argus Research followed several other analyst moves over the past few months, with a combination of stock price target cuts and downgrades following its poor third-quarter earnings report last fall. Unfortunately, that stands in stark contrast to Apollo Group (Nasdaq: APOL ) , which has soared about 50% in the past year and announced better-than-expected earnings in its most recent quarter.
For Career Education to reach perfection, it needs to demonstrate it can perform well without sacrificing the quality of its education. If it can't do so -- and investors seem to be betting that it won't -- then Career Education's prospects don't look good.
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."