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 MBIA
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 MBIA.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||(11.7%)||Fail|
|1-Year Revenue Growth > 12%||NM||NM|
|Margins||Gross Margin > 35%||97.3%||Pass|
|Net Margin > 15%||31.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||907.9%||Fail|
|Current Ratio > 1.3||0.71||Fail|
|Opportunities||Return on Equity > 15%||25.2%||Pass|
|Valuation||Normalized P/E < 20||5.59||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; MBIA's revenue went from a negative number in 2010 to a positive number in 2011. Total score = number of passes.
With only four points, MBIA can't ensure perfection for its shareholders. The company is still reeling from the crisis that threatened its very survival, although it has come a long way since the dark days of the financial meltdown.
MBIA is best known for insuring municipal bonds and asset-backed securities. For years, that was a relatively stable and profitable business. But during the financial crisis, the huge amount of defaults on mortgage-backed securities brought staggering losses for the company, as well as competitors Radian Group
But MBIA didn't die. In fact, it has largely succeeded in restructuring itself, with a goal toward bringing in more new business. Revenue hasn't recovered to pre-crisis levels, but those big losses have returned to modest profits.
Just yesterday, MBIA announced promising news that it was dropping a lawsuit against Bank of America
MBIA is still far from its old self, and the financial insurance business is still full of risk, as the company's high leverage levels indicate. MBIA still has some way to go before it gets close to perfection, but for many investors, the company just managing to survive has been impressive.
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 Fool owns shares of and has opened a short position on Bank of America. 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.