Has Lincare Holdings Become the Perfect Stock?

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 Lincare Holdings (Nasdaq: LNCR  ) 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 Lincare Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.7% Fail
  1-Year Revenue Growth > 12% 13.4% Pass
Margins Gross Margin > 35% 44.7% Pass
  Net Margin > 15% 9.3% Fail
Balance Sheet Debt to Equity < 50% 83.3% Fail
  Current Ratio > 1.3 0.64 Fail
Opportunities Return on Equity > 15% 19.1% Pass
Valuation Normalized P/E < 20 20.36 Fail
Dividends Current Yield > 2% 1.9% Fail
  5-Year Dividend Growth > 10% NM NM
        
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful; Lincare paid its first dividend in July 2010. Total score = number of passes.

Since we looked at Lincare Holdings last year, the company has dropped two points. But the declines are due to the big premium that shareholders are due to receive if an expected sale of the company goes through.

Home health care is a business that has attracted a lot of players seeking to capitalize on the aging demographics of the U.S. population. But over the past year, Gentiva Health Services (Nasdaq: GTIV  ) , Kindred Healthcare (NYSE: KND  ) , and Amedisys (Nasdaq: AMED  ) have all seen sharp losses, most of which stemmed from a budget deal last year that could cut Medicare payments for home health services.

Because Lincare focuses on home health equipment like oxygen tanks rather than providing the services itself, it didn't take as big of a hit. Still, the stock didn't go much of anywhere, and expectations for earnings growth were muted at best.

But earlier this month, German company Linde agreed to buy Lincare for $4.6 billion including assumed debt, with shareholders receiving $41.50 per share. Speculation had swirled before the announcement that either Linde or Air Liquide would make a bid. Lincare's stock immediately jumped close to that price as investors anticipated the deal will go through.

Clearly, a buyout will end Lincare's chances to reach perfection as an independent company. But at a huge premium, the deal should make shareholders quite pleased from the result and is probably the best ending that investors could have reasonably hoped for.

Keep searching
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.

It's too late to capitalize on Lincare Holdings, but we've got some other ideas you may like. 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 Lincare Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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