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 and then decide whether HealthSouth (NYSE: HLS ) 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.
- Moneymaking 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 HealthSouth.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.1%||Fail|
|1-Year Revenue Growth > 12%||6.4%||Fail|
|Margins||Gross Margin > 35%||46.5%||Pass|
|Net Margin > 15%||9.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||191.8%||Fail|
|Current Ratio > 1.3||1.31||Pass|
|Opportunities||Return on Equity > 15%||38.3%||Pass|
|Valuation||Normalized P/E < 20||11.24||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at HealthSouth last year, the company has dropped a point. Falling net margins are to blame for the drop, but shareholders are quite happy with stock-price gains of more than 30% over the past year.
HealthSouth operates nearly 100 inpatient hospitals as well as a few dozen satellite clinics. But unlike major hospital operators HCA (NYSE: HCA ) and Community Health Systems (NYSE: CYH ) , whose hospitals offer general care, HealthSouth's facilities specialize in rehabilitation, with care tailored to needs ranging from strokes and neurological trauma to hip fractures and other physical injuries.
The biggest concern that HealthSouth has faced lately has come from health-care reform. Even after the Supreme Court's affirmation of the constitutionality of most of the key provisions of the Affordable Care Act, the final impact on Medicaid reimbursement for HealthSouth is uncertain. Moreover, with UnitedHealth Group (NYSE: UNH ) , WellPoint (NYSE: WLP ) , and other health-insurance providers having to rein in their administrative costs, they may try to clamp down on costs that HealthSouth and other medical providers charge for their services.
Still, HealthSouth is holding pretty well despite the uncertainty. In its most recent quarter, HealthSouth beat earnings estimates and raised its guidance for the remainder of the year. CFO Doug Coltharp said high cash flow gave the company the chance to boost capital expenditures for maintenance while supporting growth.
For HealthSouth to improve, it really needs to get past the uncertainties that health-care reform has introduced and keep providing the services its patients need. Doing that should help it get its balance sheet in better order, and demographics may bring more sales and get HealthSouth a bit closer to perfection in the years ahead.
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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