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 Laboratory Corporation of America
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 LabCorp.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||8.7%||Fail|
|1-year revenue growth > 12%||9.4%||Fail|
|Margins||Gross margin > 35%||41.7%||Pass|
|Net margin > 15%||10.7%||Fail|
|Balance sheet||Debt to equity < 50%||91%||Fail|
|Current ratio > 1.3||0.96||Fail|
|Opportunities||Return on equity > 15%||24.6%||Pass|
|Valuation||Normalized P/E < 20||17.14||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just three points, the diagnosis for LabCorp isn't perfect. Despite having an enviable niche in the medical services industry, the company doesn't have as many attractive qualities as many investors would prefer to see.
LabCorp is a key company in the diagnostic testing arena, providing everything from simple blood and cholesterol checks to ultrasensitive tests designed to detect serious diseases and genetic conditions. In 2006, the company became the exclusive testing lab for UnitedHealth Group
Although Quest has higher sales and trades at a cheaper multiple, LabCorp beats out its rival with higher net margins, faster growth, and better returns on equity. But Quest hasn't ceded the industry, having bought out both privately held Athena Diagnostics and genetic-testing company Celera, which opened the door to business with UnitedHealth and Aetna
LabCorp isn't perfect right now, but it has the potential to become so in the future. With the right attention to growth and some clean-up on its balance sheet, LabCorp could look a lot more attractive soon.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bio-Reference Labs and UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of LabCorp, UnitedHealth Group, and Quest Diagnostics, as well as creating a diagonal call position in UnitedHealth Group. 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.