Has Community Health Systems 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 Community Health Systems (NYSE: CYH  ) 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 Community Health Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

16%

Pass

 

1-year revenue growth > 12%

9.4%

Fail

Margins

Gross margin > 35%

38%

Pass

 

Net margin > 15%

2%

Fail

Balance sheet

Debt to equity < 50%

307.3%

Fail

 

Current ratio > 1.3

1.60

Pass

Opportunities

Return on equity > 15%

11.5%

Fail

Valuation

Normalized P/E < 20

13.10

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

4 out of 10

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

Since we looked at Community Health Systems last year, the company has kept its four-point score. But the stock has absolutely soared, more than doubling over the past year as prospects for the company have picked up extensively.

Health care reform has had a huge impact on the entire industry, and hospital companies like Community Health have had the most at stake from the prospects for Obamacare. After last summer's Supreme Court review of the law and throughout the Presidential election campaign, shares have hospital stocks moved up and down with Obamacare's prospects, and when President Obama and his health care law eventually won out, Community Health was one of the biggest beneficiaries.

Community Health and its peers have soared because the individual insurance mandate should help it avoid the free care hospitals have to provide to uninsured patients. Essentially, Community Health will shift those costs onto UnitedHealth (NYSE: UNH  ) , WellPoint (NYSE: ANTM  ) , and other health insurance companies, which will have to hope that they can recoup enough in additional premiums to offset those costs.

But one issue that lingers in the industry is fraud. Community Health rival Health Management Associates (NYSE: HMA  ) was the subject of a 60 Minutes investigation last December alleging Medicare-related fraud. Community Health had to field similar allegations two years ago from competitor Tenet Healthcare (NYSE: THC  ) , but the company bounced back, and shares have tripled since then.

For Community Health to improve, it needs to refocus on growth and get its balance sheet in better order. By reaping the rewards from Obamacare, Community Health could get a lot closer to perfection in the coming years.

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.

Even as hospital stocks soared, shares of UnitedHealth and other health insurers fell immediately after President Obama was reelected. Is Obamacare a death knell for health insurers, or is the market missing out on some of the opportunities the law presents? In this brand new premium report on UnitedHealth, The Motley Fool takes a long term view, honing in on prospects for UnitedHealth in a post-Obamacare world. So don't miss out -- simply click here now to claim your copy today.

Click here to add Community Health Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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