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 UnitedHealth Group (NYSE: UNH ) 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 UnitedHealth Group.
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
UnitedHealth Group gets to the middle of the pack with a score of five. The health insurer has seen tough times with health-care reform still uncertain, but the company has still managed to grow.
Health insurers are on the front lines of the health-care debate that continues to rage even after the first anniversary of the passage of health-care reform laws. Along with peers Cigna (NYSE: CI ) , Humana (NYSE: HUM ) , and WellPoint (NYSE: WLP ) , UnitedHealth faces the ire of reformers who argue that their profits make health care unaffordable on a national basis. By interposing themselves into the relationship between doctors and patients, insurers have made it almost impossible for consumers to get straight answers about cost.
But the danger to UnitedHealth from health-care reform may well be overstated. As long as insurance companies are allowed to pass on higher costs to customers, then the biggest impact of health-care reform should be to spread out the costs of the formerly uninsured onto existing policyholders through higher premiums. Only if rate increases are artificially capped will UnitedHealth face a dilemma: accept smaller margins or shrink its business.
The company's score reflects that uncertainty, with an attractively cheap valuation given the company's past growth. UnitedHealth's earnings multiples are similar to its peers, although one area in which the company stands out is in its recent dividend growth.
Nevertheless, future pressure on costs means that margins are unlikely to increase. Although dividends may continue to grow, low margins will likely cause UnitedHealth to always fall short of perfection.
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.
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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.
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