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 Travelers (NYSE: TRV ) 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 Travelers.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.3%||Fail|
|1-Year Revenue Growth > 12%||1.1%||Fail|
|Margins||Gross Margin > 35%||20.8%||Fail|
|Net Margin > 15%||5.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||27.0%||Pass|
|Current Ratio > 1.3||0.40||Fail|
|Opportunities||Return on Equity > 15%||5.7%||Fail|
|Valuation||Normalized P/E < 20||29.44||Fail|
|Dividends||Current Yield > 2%||2.8%||Pass|
|5-Year Dividend Growth > 10%||9.5%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Travelers only scores two points on our 10-point scale. The company had a terrible 2011, but it's in a position to recover if 2012 goes a little bit better on the catastrophe front.
The insurance industry got a bad reputation during the financial crisis, when AIG (NYSE: AIG ) found itself at the epicenter of the systemic-risk controversy. Billions in bailouts later, AIG is still around -- but as fellow Fool Matt Koppenheffer pointed out recently, no company is more the antithesis of AIG than Travelers. With big profits in 2008 and 2009, Travelers stands out as a true performer in tough times.
In general, however, 2011 was a bad year for the industry. Travelers dodged a bullet by having little exposure to Japan's earthquake and tsunami early in the year, which hit supplemental insurance provider Aflac (NYSE: AFL ) and fellow property/casualty insurer MetLife (NYSE: MET ) much harder.
Unfortunately, the company wasn't so lucky in dealing with U.S. weather events. Between bad storms across the middle of the nation and Hurricane Irene's march up the East Coast, Travelers suffered substantial losses. Yet even there, it managed to protect itself better than Allstate (NYSE: ALL ) , which had higher damage-claim totals.
For the stock to improve, Travelers needs 2012 to be kinder than 2011 was. If the company can catch a break with fewer big-ticket losses, then it could reestablish its industry leadership quickly and effectively.
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.
Travelers isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Travelers to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.