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 WellPoint (NYSE: WLP ) 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 WellPoint.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.3%||Fail|
|1-Year Revenue Growth > 12%||1.3%||Fail|
|Margins||Gross Margin > 35%||22.5%||Fail|
|Net Margin > 15%||4.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||45.4%||Pass|
|Current Ratio > 1.3||1.75||Pass|
|Opportunities||Return on Equity > 15%||11.9%||Fail|
|Valuation||Normalized P/E < 20||10.26||Pass|
|Dividends||Current Yield > 2%||1.4%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful; WellPoint started paying a dividend in March 2011. Total score = number of passes.
Since we looked at WellPoint last year, the health-insurance company has dropped a point. A big drop in returns on equity outweighed the company's decision to start paying a dividend early last year.
WellPoint has the most members of any health-benefits company, with 34.4 million members and more than 66 million individuals served through its subsidiaries as of Sept. 30, 2011. That puts it in a prime position against its peers, especially as uncertainty about the future of health-care reform continues to drive down valuations in the sector.
It's likely that the Supreme Court will need to decide whether mandatory health insurance is constitutional. Without those provisions, UnitedHealth Group (NYSE: UNH ) , Aetna (NYSE: AET ) , and WellPoint alike will face the potential hit of having to accept new members, even if they have pre-existing conditions, without being able to count on an influx of relatively healthy customers who would be required to obtain insurance under the law as it now stands. With all three health insurers having very low margins, none can afford to take a big hit.
In the meantime, WellPoint is taking many steps to cut costs. For instance, it took a swing at Pfizer (NYSE: PFE ) by choosing to support a generic version of its Lipitor through lower co-pays for the generic than the name-brand drug. In addition, WellPoint brought on IBM (NYSE: IBM ) to provide supercomputer technology to help its network of doctors provide better diagnosis and treatment to patients. That move will help IBM break into the industry, but it will also give WellPoint a competitive advantage in efficiency gains.
WellPoint is unlikely to move up far in the point totals until there's some clarity on the health-care reform front. But the company's starting to pay a dividend is a positive sign that the company plans to keep doing well no matter what happens.
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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