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 UnitedHealth Group (NYSE: UNH ) 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 UnitedHealth Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.3%||Fail|
|1-Year Revenue Growth > 12%||8.2%||Fail|
|Margins||Gross Margin > 35%||27.0%||Fail|
|Net Margin > 15%||5.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||41.4%||Pass|
|Current Ratio > 1.3||0.74||Fail|
|Opportunities||Return on Equity > 15%||19.0%||Pass|
|Valuation||Normalized P/E < 20||12.89||Pass|
|Dividends||Current Yield > 2%||1.1%||Fail|
|5-Year Dividend Growth > 10%||82.8%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at UnitedHealth Group last year, the company has lost a point. Slowing revenue growth has affected the company's score, even though the stock has performed quite well since early 2011.
For quite a while, the fate of UnitedHealth and its peers has rested on health care reform. Before reform efforts took shape, UnitedHealth, Humana (NYSE: HUM ) , and Coventry Health Care (NYSE: CVH ) sported some of the most profitable medical loss ratios for individual coverage, while WellPoint (NYSE: WLP ) and Cigna (NYSE: CI ) joined UnitedHealth with equally impressive figures for large-group insurance coverage. With reform potentially requiring those medical loss ratios to go up, the companies that were most successful in keeping costs down counterintuitively faced the biggest penalties from a new law.
Yet reform is a mixed bag for UnitedHealth. Although having to accept patients with pre-existing conditions hurts profits, the influx of new business from mandatory insurance provisions would offset those losses.
With recent arguments before the Supreme Court about the constitutionality of the individual mandate for health insurance coverage, investors are extremely concerned that if the law is struck down, it would spell disaster for insurers. The biggest concern for UnitedHealth has to be a partial strike-down that could eliminate mandatory coverage while still requiring payments of claims for pre-existing conditions.
For UnitedHealth to get moving back in the right direction, it needs clarity once and for all on the health care law. Once the Supreme Court announces its decision sometime during the summer, the company should be able to chart a reasonable path going forward.
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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