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 Universal Insurance Holdings (AMEX: UVE) 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 Universal Insurance.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 73.7% Pass
  1-Year Revenue Growth > 12% 15.7% Pass
Margins Gross Margin > 35% 48.6% Pass
  Net Margin > 15% 12.9% Fail
Balance Sheet Debt to Equity < 50% 34.8% Pass
  Current Ratio > 1.3 1.55 Pass
Opportunities Return on Equity > 15% 22.1% Pass
Valuation Normalized P/E < 20 7.41 Pass
Dividends Current Yield > 2% 7.3% Pass
  5-Year Dividend Growth > 10% 10.7%* Pass
  Total Score   9 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
*3.5-year growth rate.

Universal Insurance reaches near-perfection with a score of 9. That's a surprise given the trouble the financial industry has had in recent years.

Universal is a tiny company that primarily sells homeowners' insurance. It's a leader in Florida and has expanded to include the Carolinas and Hawaii as well.

The company's small size gives it a huge growth edge over more mature competitors. Fellow insurers Allstate (NYSE: ALL) and Chubb (NYSE: CB) haven't seen any revenue growth over the past five years. Yet despite slow growth and a much less attractive dividend, both of those stocks trade at more expensive valuations than Universal.

At the same time, Universal is riskier than more geographically diverse insurers. Unlike Travelers (NYSE: TRV) and Hartford Financial (NYSE: HIG), which write policies all over the country, Universal is particularly exposed to hurricane-prone Florida. Although expansion will remedy that in part, a bad year could put a big hit on profits.

Still, for a small-cap stock, Universal is doing everything right at the moment. It's hard to find a stock that's closer to perfect.

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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