Has Tenet Healthcare 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 Tenet Healthcare (NYSE: THC  ) 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 Tenet Healthcare.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.6% Fail
  1-Year Revenue Growth > 12% 5.5% Fail
Margins Gross Margin > 35% 41.0% Pass
  Net Margin > 15% 0% Fail
Balance Sheet Debt to Equity < 50% 381.4% Fail
  Current Ratio > 1.3 1.37 Pass
Opportunities Return on Equity > 15% 5.0% Fail
Valuation Normalized P/E < 20 11.43 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   3 out of 10

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

Since we looked at Tenet Healthcare last year, the company has lost a point. A big drop in return on equity is responsible for the decline, even though the hospital operator's stock has gained around 20% in the past year.

In recent years, health care providers have gotten whipsawed by the threat of new regulation and attempts at reform. For instance, late last year, reports that Medicare and Medicaid might toughen their standards for approving procedures for heart-, spine-, and joint-related issues sent Tenet's stock plunging (along with its competitors). Yet when those reports turned out to be overstated, HCA (NYSE: HCA  ) , Community Health Systems (NYSE: CYH  ) , Health Management Associates (NYSE: HMA  ) and Tenet all regained their lost ground.

The pinnacle of this trend came at mid-year, when the Supreme Court largely upheld the key provisions of the Affordable Care Act. For hospital operators like Tenet, the good news was that expanded Medicaid coverage should provide revenue for uninsured patients who previously would have received treatment without paying anything. The change may result in a tug of war between Tenet and WellCare Health Plans (NYSE: WCG  ) and its Medicaid-administration peers, but fighting over something is better than automatically getting nothing.

For Tenet to improve, it needs to make the most of new opportunities under health care reform, ideally before the rules change again. With hefty competition, though, Tenet faces an uphill climb if it wants to get closer to perfection.

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.

Tenet Healthcare may not be perfect, but we've got some other ideas you might 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 Tenet Healthcare 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. 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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Related Tickers

10/25/2016 4:02 PM
THC $23.37 Down -0.45 -1.89%
Tenet Healthcare CAPS Rating: **
CYH $10.24 Down -0.16 -1.54%
Community Health S… CAPS Rating: *****
HCA $80.96 Down -0.76 -0.93%
HCA Holdings CAPS Rating: ***
HMA.DL $0.00 Down +0.00 +0.00%
Health Management… CAPS Rating: No stars
WCG $118.33 Up +0.11 +0.09%
WellCare Health Pl… CAPS Rating: *****