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 CNinsure (Nasdaq: CISG ) 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 CNinsure.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||43.8%||Pass|
|1-Year Revenue Growth > 12%||22.9%||Pass|
|Margins||Gross Margin > 35%||47.5%||Pass|
|Net Margin > 15%||(19.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||8.83||Pass|
|Opportunities||Return on Equity > 15%||(23.3%)||Fail|
|Valuation||Normalized P/E < 20||7.08||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at CNinsure last year, the company has lost two points. Much more troubling is the huge drop in the insurance broker's stock, which stands in stark contrast to CNinsure's apparent promise in the Chinese market.
Most insurance companies have faced significant struggles in recent years. Big catastrophic events sunk profits at Allstate (NYSE: ALL ) and Travelers (NYSE: TRV ) last year, as claims losses skyrocketed. For Hartford Financial (NYSE: HIG ) and Manulife Financial (NYSE: MFC ) , low interest rates are also playing a role in hamstringing growth by cutting investment income, and weak markets have triggered annuity and life-insurance policy guarantees that put the insurers in financial danger during the market meltdown in 2008.
CNinsure, however, sells insurance in China, which is an insurance market that's not only insulated from many of the problems its global peers have dealt with but also has huge potential for growth. With a rising middle class, life insurance will become a more important element of financial protection, and CNinsure should be in a position to capitalize from higher demand.
But in light of unrelated controversies involving other Chinese companies, nervous investors have steered clear of small-caps like CNinsure. A year ago, company CEO Yinan Hu announced that he and a pair of investment companies wanted to try to take CNinsure private in order to unlock value that shareholders apparently didn't recognize. But, when he later pulled that offer, shares tanked -- and they've never recovered.
CNinsure's score should rise next year naturally as goodwill-impairment charges bring margin and return on equity figures back up. The bigger question, though, is whether investors will get over their skepticism of Chinese small-caps. So far at least, there are few signs that will happen anytime soon.
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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