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 Allstate (NYSE: ALL ) 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 Allstate.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.8%)||Fail|
|1-Year Revenue Growth > 12%||4.0%||Fail|
|Margins||Gross Margin > 35%||14.9%||Fail|
|Net Margin > 15%||2.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||33.9%||Pass|
|Current Ratio > 1.3||0.71||Fail|
|Opportunities||Return on Equity > 15%||4.2%||Fail|
|Valuation||Normalized P/E < 20||26.60||Fail|
|Dividends||Current Yield > 2%||2.7%||Pass|
|5-Year Dividend Growth > 10%||(9.7%)||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Allstate last year, the company hasn't been able to improve on its two-point score. A horrendous 2011 for the insurance industry certainly didn't help.
Insurance companies had to deal with a large number of disasters last year. The Japanese earthquake and tsunami came early in the year, but bad storms in the U.S. that culminated in the costly trip of Hurricane Irene up the East Coast brought huge losses to many companies. Yet while Travelers (NYSE: TRV ) and Progressive (NYSE: PGR ) both saw their catastrophe losses jump due to the weather events, neither one's losses came close to Allstate's $2.3 billion for the second quarter of 2011.
Partially because of all those losses, Allstate now trades at well below book value. That doesn't make it the cheapest insurer out there, as the notorious AIG (NYSE: AIG ) is much cheaper. But Allstate's focus on personal-line insurance versus commercial and life insurance gives it a niche presence that contrasts strongly with AIG's broader scope.
But Allstate has been making moves to grow. Almost a year ago, it bought the online insurer Esurance from White Mountains Insurance Group (NYSE: WTM ) for about $1 billion, broadening its appeal to a younger customer audience. Analysts expect Allstate's earnings to surpass 2010 levels this year, showing how quickly a recovery the company has made.
For Allstate to start improving its score, it really needs to get some relief from bad weather and other loss-causing events. If 2012 is a little kinder to the company, then Allstate could finally start climbing up toward perfection.
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.
Allstate 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 Allstate to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.