Has Amerigroup 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 Amerigroup (NYSE: AGP  ) 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 Amerigroup.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 16.9% Pass
  1-Year Revenue Growth > 12% 9.6% Fail
Margins Gross Margin > 35% 15.7% Fail
  Net Margin > 15% 2.4% Fail
Balance Sheet Debt to Equity < 50% 55.1% Fail
  Current Ratio > 1.3 1.16 Fail
Opportunities Return on Equity > 15% 12.3% Fail
Valuation Normalized P/E < 20 29.56 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   1 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Amerigroup last year, the company has lost three points. But after trading lower most of the year, a buyout bid has lifted shares of the Medicaid coverage provider, giving shareholders about a 25% gain in the past year and making many of the metrics above moot.

Providing services for state Medicaid programs is extremely competitive. Big companies UnitedHealth (NYSE: UNH  ) and Aetna compete against Amerigroup and several other rivals, and the stakes can be huge, with the bidding process in many states producing huge winners and losers.

This time last year, though, Amerigroup was dealing with some serious problems that could have jeopardized its entire business. The company double-billed the state of Georgia for some of its services, which sent both its shares and those of rival WellCare Health (NYSE: WCG  ) down sharply and introduced new uncertainty to the industry. Now though, in the aftermath of the Supreme Court's decision on health-care reform, most managed care providers have recovered somewhat from their losses.

Amerigroup got a welcome boost from a takeover bid from WellPoint (NYSE: WLP  ) . With the company planning to buy out Amerigroup at $92 per share, shareholders got almost a 50% jump. The move has now increased speculation about further potential merger and acquisition activity, with Centene (NYSE: CNC  ) and Magellan Health having come up as possible targets.

As long as the takeover takes place, Amerigroup won't have any opportunity to improve toward perfection on its own. Given the trouble the stock had producing gains prior to the offer, shareholders are probably just as happy things turned out this way.

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.

Amerigroup isn't perfect, but we've got some other ideas for you to take a look at. 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 Amerigroup 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. The Motley Fool owns shares of WellPoint. Motley Fool newsletter services have recommended buying shares of Amerigroup, WellPoint, and UnitedHealth Group, as well as creating a diagonal call position in UnitedHealth Group. 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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