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 Universal Insurance (AMEX: UVE ) 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 Universal Insurance.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||42.2%||Pass|
|1-Year Revenue Growth > 12%||5%||Fail|
|Margins||Gross Margin > 35%||50.4%||Pass|
|Net Margin > 15%||12.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||36.3%||Pass|
|Current Ratio > 1.3||1.26||Fail|
|Opportunities||Return on Equity > 15%||19.5%||Pass|
|Valuation||Normalized P/E < 20||5.15||Pass|
|Dividends||Current Yield > 2%||8%||Pass|
|5-Year Dividend Growth > 10%||6.7%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Universal Insurance last year, the insurance company has lost three points. A really bad 2011 for insurers generally hit Universal's dividend growth, current ratio, and sales growth in the past year.
Most of us know all too well just how calamitous the past year has been in terms of natural disasters. Hurricane Irene's trip up the East Coast in particular hurt many insurers. Tower Group (Nasdaq: TWGP ) had to take a big catastrophe charge during the quarter that Irene hit, while larger insurer Travelers (NYSE: TRV ) had a massive net charge of more than $600 million. Meanwhile, Aflac (NYSE: AFL ) suffered from the Japanese earthquake and tsunami.
But with its concentration in Florida, Universal's catastrophe losses haven't been bad. Instead, the insurer has had substantial unrealized losses on investments that have pulled down earnings, especially during the third quarter when the stock market plunged.
As the company expands more into the Carolinas as well as Hawaii, Universal will run into increased competition. But really, Universal's biggest need is for financial markets to stabilize and start contributing more to the company's bottom line. If it can get those tailwinds working for it again, Universal could move back toward its near-perfect status in 2012 and beyond.
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 the best investments from the rest.
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