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 Apollo Group (Nasdaq: APOL ) 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 Apollo Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.7%||Fail|
|1-Year Revenue Growth > 12%||(8.2%)||Fail|
|Margins||Gross Margin > 35%||61.3%||Pass|
|Net Margin > 15%||10.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||8.6%||Pass|
|Current Ratio > 1.3||1.51||Pass|
|Opportunities||Return on Equity > 15%||31.8%||Pass|
|Valuation||Normalized P/E < 20||8.95||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 a score of five, Apollo Group finishes with about a "C" on our grading scale. Yet the for-profit educator has seen a huge amount of controversy in recent years, and it's having an effect on the company's business model.
Apollo runs the University of Phoenix, which has the largest enrollment of the for-profit colleges. But the for-profit education industry has drawn criticism for high student-loan balances and low graduation rates. Last year, a GMI report on fiduciary risk in the industry gave Apollo and Corinthian College (Nasdaq: COCO ) its lowest rating.
The industry dodged a bullet last summer, when the Department of Education released new regulations for federal funding that weren't as severe as some had originally thought. That was arguably more important to smaller peers Corinthian and ITT Educational Services (NYSE: ESI ) , which some thought were in more danger of losing federal funding. By comparison, Strayer Education (Nasdaq: STRA ) and American Public Education (Nasdaq: APEI ) had much lower default rates, with Apollo coming in the middle of the pack. Still, the news boosted shares of Apollo significantly along with the rest of the industry.
But shareholders got a slap in the face earlier this week when Apollo issued guidance for 2012. The company lowered its projections for operating profit by about 4%. But what likely caused the 16% one-day plunge was a prediction that new enrollment would decrease year-over-year. That has implications well into the future.
For Apollo to reach toward perfection, it needs to establish standards of excellence that remove the stigma that for-profit educational institutions have right now. If it can succeed, Apollo could be on the ground floor of a huge opportunity.
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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