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 Progressive (NYSE: PGR ) 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 Progressive.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1%||Fail|
|1-Year Revenue Growth > 12%||3.7%||Fail|
|Margins||Gross Margin > 35%||10.6%||Fail|
|Net Margin > 15%||6.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||43.4%||Pass|
|Current Ratio > 1.3||0.54||Fail|
|Opportunities||Return on Equity > 15%||17.1%||Pass|
|Valuation||Normalized P/E < 20||14.84||Pass|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||65.8%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Progressive last year, the company hasn't seen its score move. Some big hits to the insurance industry in 2011 certainly played a role in the stock's lackluster performance over the past year.
A string of disasters caused big losses for insurers last year. Early in the year, storms across the U.S. hurt results, with Progressive posting a $125 million catastrophe loss in the second quarter while Allstate (NYSE: ALL ) weighed in at a much worse $2.3 billion. Then when Hurricane Irene hit, it led to another round of losses. Travelers (NYSE: TRV ) took a $600 million hit from the storm in its third quarter.
In addition, the company faces substantial competition in its auto insurance business. Allstate got itself into the online business by buying the Esurance unit of White Mountains Insurance (NYSE: WTM ) as part of a $1 billion transaction. Meanwhile, Berkshire Hathaway (NYSE: BRK-B ) and its Geico unit have more than 10 million auto-policy holders, along with the backing of Warren Buffett's financial empire to get through any rough patches.
For Progressive to keep making progress, it will need to find ways to boost margins and keep increasing its dividend. If the post-storm environment strengthens pricing power, then the company will see revenue rise naturally -- as long as it stays competitive.
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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