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.
What We Want to See
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.
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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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."