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 Health Management Associates (NYSE: HMA) 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 Health Management Associates.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 7% Fail
  1-Year Revenue Growth > 12% 14.5% Pass
Margins Gross Margin > 35% 47.2% Pass
  Net Margin > 15% 3.1% Fail
Balance Sheet Debt to Equity < 50% 497.7% Fail
  Current Ratio > 1.3 1.84 Pass
Opportunities Return on Equity > 15% 35.9% Pass
Valuation Normalized P/E < 20 9.63 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With five points, Health Management Associates looks pretty good, but definitely not perfect. The company is dealing with a lot of uncertainty in the health-care industry right now, and unfortunately, it could be a while before investors get clarity about HMA's prospects.

Health Management Associates is based in Florida and operates hospitals and other health-care facilities outside urban areas, focusing on the Southeast. Like peers Tenet Healthcare (NYSE: THC), HCA (NYSE: HCA), and Community Health Systems (NYSE: CYH), HMA relies on government programs like Medicare and Medicaid for a significant part of its revenue.

Throughout the industry, though, the recession has hit hospitals hard. Not only do hospitals end up largely footing the bill for uninsured patients, but people have also cut back on elective procedures that produce higher profit margins for hospitals. That hit shares of HMA hard back in July, along with fellow hospital operators LifePoint (Nasdaq: LPNT) and Universal Health Services (NYSE: UHS). But so far, HMA hasn't really seen a huge rebound in its stock.

Most recently, Health Management Associates got whipsawed on conflicting reports about whether repayment reviews in some states could hit reimbursement rates on certain medical procedures. But the much bigger long-term question is whether health-care reform will end up cutting revenue throughout the hospital systems -- and whether the big burden of cost reduction falls on hospitals or on insurers like UnitedHealth (NYSE: UNH). Until courts, legislators, and bureaucrats make final decisions about that, HMA won't get a whole lot closer to perfection.

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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on 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.