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 Fidelity National Financial (NYSE: FNF ) 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 Fidelity National Financial.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||(12.5%)||Fail|
|1-year revenue growth > 12%||(15.7%)||Fail|
|Margins||Gross margin > 35%||66.3%||Pass|
|Net margin > 15%||7.6%||Fail|
|Balance sheet||Debt to equity < 50%||25.0%||Pass|
|Current ratio > 1.3||2.47||Pass|
|Opportunities||Return on equity > 15%||8.2%||Fail|
|Valuation||Normalized P/E < 20||14.85||Pass|
|Dividends||Current yield > 2%||3.2%||Pass|
|5-year dividend growth > 10%||(16.3%)||Fail|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With five points, Fidelity National Financial finishes in the middle of the pack. If the rebound in housing is real, then it could be that affiliated businesses like Fidelity will start to rebound as well.
Fidelity National Financial provides title insurance, which most real estate transactions require. As you can imagine, this was an extremely lucrative business during the housing boom, when transactions ran rampant and the incremental income that title insurance companies could earn was extremely high. Between Fidelity and First American Financial (NYSE: FAF ) , the top two companies control about 70% of the market, giving both the potential for huge profits -- especially considering that losses are few and far between.
Lately, the housing market has started to perk up, pushing shares of homebuilders higher. There's evidence that homebuilders are seeing more activity, as Standard Pacific (NYSE: SPF ) and Hovnanian (NYSE: HOV ) have had increased backlogs and rising orders recently. But the nice thing about title insurers is that they can profit even when prices are falling -- as long as sales happen. That's why the recent news of more mortgage concessions could help Fidelity a lot more than the homebuilders, as Bank of America (NYSE: BAC ) and a host of other mortgage lenders get bad assets off their books -- along with brand new title insurance policies for their buyers.
Fidelity will probably never see the go-go days of the mid-2000s again. But from its extremely depressed levels, the title insurer could get a lot closer to perfection simply by hitting bottom and sustaining a more realistic long-term growth path.
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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