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 MetLife (NYSE: MET ) 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 MetLife.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.1%||Fail|
|1-Year Revenue Growth > 12%||27.7%||Pass|
|Margins||Gross Margin > 35%||30.5%||Fail|
|Net Margin > 15%||8.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||111.8%||Fail|
|Current Ratio > 1.3||2.07||Pass|
|Opportunities||Return on Equity > 15%||10.8%||Fail|
|Valuation||Normalized P/E < 20||5.9||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||4.6%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at MetLife last year, the company has seen its score rise by a point, as its dividend yield has improved. But a nearly 30% drop in the stock doesn't have shareholders very happy about the insurance company's prospects.
MetLife's insurance business has historically been very solid. Through past ups and downs, the company has managed to weather storms and maintain its financial strength. But the past few years have been very challenging for insurance companies.
On one hand, major disasters last year caused catastrophe-loss figures to skyrocket for many industry players. Yet low interest rates are really hurting the industry by cutting the returns that insurance companies earn on their investment portfolios.
Those low returns led MetLife to become one of the first companies to stop selling long-term-care insurance. Prudential (NYSE: PRU ) has followed suit by cutting individual long-term-care coverage, while Genworth (NYSE: GNW ) just last week announced major changes to its long-term-care policies designed to fight low interest rates. Canadian company Sun Life Financial (NYSE: SLF ) even took the extreme step of no longer selling individual life insurance and certain other financial products in the U.S. anymore.
Still, MetLife is trying to make smart strategic moves. It sold its retail banking business to General Electric (NYSE: GE ) , perhaps in an effort to avoid arguable mischaracterizations that its financial condition is in jeopardy. MetLife failed the Fed's stress tests, but CEO Steve Kandarian argued that the results made no sense as the standards seemed inappropriate for insurance companies.
Regardless, for MetLife to improve, it would like to see interest rates rise. Without that, MetLife could continue to flounder for the foreseeable future.
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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