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 Genworth Financial
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 Genworth Financial.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (0.7%) | Fail |
| 1-year revenue growth > 12% | (0.3%) | Fail | |
| Margins | Gross margin > 35% | 7.9% | Fail |
| Net margin > 15% | 1.1% | Fail | |
| Balance sheet | Debt to equity < 50% | 62.8% | Fail |
| Current ratio > 1.3 | 1.72 | Pass | |
| Opportunities | Return on equity > 15% | 1.6% | Fail |
| Valuation | Normalized P/E < 20 | 12.66 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 2 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Genworth Financial last year, the company has picked up another point. But the stock's drop of nearly 50% shows just how difficult an environment insurance companies face right now.
Genworth has two primary businesses, both of which have struggled in recent years. On the life insurance side, the company has had to deal with low interest rates and products that haven't been as profitable as many had hoped. For instance, although Genworth isn't following in the footsteps of Prudential
The company's mortgage insurance business also took a big hit during the housing bust. Recently, that business appears to have bounced back somewhat, as Radian Group
Earlier this year, Genworth got more bad news when it had to delay its IPO of its Australian mortgage insurance business. With some deterioration in the Australian housing market, Genworth could have trouble getting the transaction done at all, which would thwart its hopes to raise capital through the sale.
But Genworth has seen some interest in its stock among institutional investors. Less than a month ago, hedge fund Highfields Capital increased its stake in the company, pushing shares up more than 10% on the announcement.
For Genworth to improve, it needs the lousy interest rate environment to go away. Unfortunately, that doesn't look likely, which will hamper Genworth's attempt to move toward perfection for quite a while.
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.
Genworth Financial isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Genworth Financial to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
