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 Molina Healthcare (NYSE: MOH ) 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 Molina Healthcare.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||18.9%||Pass|
|1-Year Revenue Growth > 12%||16.7%||Pass|
|Margins||Gross Margin > 35%||19.1%||Fail|
|Net Margin > 15%||0.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||28.9%||Pass|
|Current Ratio > 1.3||1.74||Pass|
|Opportunities||Return on Equity > 15%||2.8%||Fail|
|Valuation||Normalized P/E < 20||13.94||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 five points, Molina Healthcare finishes in the middle of the pack, but some recent bad news could push the stock further away from perfection in the future if the company can't recover quickly.
Molina provides managed health care plans for Medicaid recipients in a number of states around the country. With about 1.7 million recipients of Medicaid and other government health care programs under its umbrella, Molina makes contracts with hospitals and health care providers to serve its customers.
Surprisingly, the Medicaid provider business is a cutthroat one. Last summer, Molina won three contracts to provide services in Texas, joining Amerigroup (NYSE: AGP ) and Centene (NYSE: CNC ) with big revenue boosts that overshadowed smaller gains from UnitedHealth (NYSE: UNH ) and HealthSpring. But in Missouri, Molina missed out, prompting the company to sue the state to block the awards to rival firms. Most recently, Molina shares plunged after Ohio passed it over for its Medicaid program; instead, the state went with Aetna (NYSE: AET ) and UnitedHealth, among others.
The bigger question going forward is how federal health care laws will change the Medicaid program. Nevertheless, it seems likely that government assistance won't go away completely. Meanwhile, the industry has to overcome perceptions of impropriety, with some companies having faced allegations of fraud in recent years.
For Molina to keep improving, it needs to stay competitive in keeping existing business and picking up new states to add to its lineup. If it can execute on that plan, then Molina could move closer to perfection in the years to come.
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.
Molina Healthcare may not be 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 Molina Healthcare to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.