Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Anworth Mortgage Asset (NYSE: ANH) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Anworth.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 21.3% pass
  1-Year Revenue Growth > 12% (1.2%) fail
Margins Gross Margin > 35% 100% pass
  Net Margin > 15% 88.2% pass
Balance Sheet Debt to Equity < 50% 589.3% fail
  Current Ratio > 1.3 0.01 fail
Opportunities Return on Equity > 15% 12.7% fail
Valuation Normalized P/E < 20 11.21 pass
Dividends Current Yield > 2% 13.5% pass
  5-Year Dividend Growth > 10% 5.2% fail
  Total Score   5 out of 10

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

Anworth racks up five points on our scale. With dividend-hungry investors crawling over the mortgage REIT stocks like ants on a picnic blanket coated in honey, it's no surprise that Anworth has gotten a lot of investor attention lately.

Look at the top of the dividend yield leaderboards, and you'll see American Capital Agency (Nasdaq: AGNC), Annaly Capital (NYSE: NLY), and a host of other companies, all of which have the same basic business model as Anworth: borrowing money via short-term financing and using it to buy mortgage securities. Unlike Chimera Investment (NYSE: CIM), which earns a higher yield by buying higher-risk mortgage-backed securities that don't have the backing of Fannie Mae or Freddie Mac, Anworth sticks with government-backed mortgages.

The inherent uncertainty with Anworth comes from whether it can sustain its current level of profitability. After releasing disappointing results earlier this month, analysts are increasingly concerned that the industry has seen the high-water mark for interest rate spreads, which drive profits. Also, Credit Suisse recently downgraded the stock, arguing that Anworth in particular will see returns on equity fall below those of competing mortgage REITs.

If you're looking for a risk-free stock that'll give you guaranteed 13.5% returns year in and year out, then Anworth will inevitably disappoint you. But if you're prepared for the ups and downs of interest rates and are willing to accept lower returns during the down periods of the rate cycle, then Anworth might make a good investment for you.

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 Anworth Mortgage to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger own shares of Chimera. The Fool owns shares of Annaly Capital Management. 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.