Is Bridgepoint Education 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 Bridgepoint Education (NYSE: BPI  ) 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 Bridgepoint Education.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 139.6% Pass
  1-year revenue growth > 12% 49.5% Pass
Margins Gross margin > 35% 74.1% Pass
  Net margin > 15% 19.3% Pass
Balance sheet Debt to equity < 50% 0% Pass
  Current ratio > 1.3 1.58 Pass
Opportunities Return on Equity > 15% 67% Pass
Valuation Normalized P/E < 20 7.62 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With eight points, Bridgepoint Education looks almost perfect. Yet the company has faced serious allegations that have threatened not just its own business but the viability of the entire for-profit education industry.

During the recession, private school operators flourished as unemployed workers rushed back to get much-needed training and skills updates. Many of these workers took advantage of student loan programs to get the education they needed. Bridgepoint came public in 2009 to strong investor interest.

Last year, however, government reports scrutinizing the industry criticized several of Bridgepoint's peers, including ITT Educational Services (NYSE: ESI  ) , Strayer (Nasdaq: STRA  ) , and Corinthian Colleges (Nasdaq: COCO  ) , for having extremely low student loan repayment rates among their attendees. Yet as Rising Star analyst Andy Louis-Charles has said repeatedly, Bridgepoint has bucked these trends, with better repayment rates and rising enrollment even as some of its competitors have shrunk in size.

Bridgepoint has even started returning money to investors. Although it doesn't pay a dividend, the company has made substantial share repurchases during the year and recently authorized more.

The combination of huge revenue growth and profitability with rock-bottom valuations doesn't come along very often. It's clear that Bridgepoint has been painted with the same brush as its inferior competitors, but for now, it looks as close to perfect as you're likely to see.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bridgepoint Education. Motley Fool newsletter services have recommended creating a call spread position in Bridgepoint Education. 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.


Read/Post Comments (1) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 10, 2011, at 7:55 AM, MashkiaTsair wrote:

    About "Dividends" I disagree -- if company buybacks shares at reasonable prices in the open market, it is dividend-equivalent.

    Company invested $38 M in share-buybacks last year, putting it way above your 2% requirements.

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