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 Tenet Healthcare
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 Tenet Healthcare.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 3.6% | Fail |
| 1-Year Revenue Growth > 12% | 5.5% | Fail | |
| Margins | Gross Margin > 35% | 41.0% | Pass |
| Net Margin > 15% | 0% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 381.4% | Fail |
| Current Ratio > 1.3 | 1.37 | Pass | |
| Opportunities | Return on Equity > 15% | 5.0% | Fail |
| Valuation | Normalized P/E < 20 | 11.43 | Pass |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Tenet Healthcare last year, the company has lost a point. A big drop in return on equity is responsible for the decline, even though the hospital operator's stock has gained around 20% in the past year.
In recent years, health care providers have gotten whipsawed by the threat of new regulation and attempts at reform. For instance, late last year, reports that Medicare and Medicaid might toughen their standards for approving procedures for heart-, spine-, and joint-related issues sent Tenet's stock plunging (along with its competitors). Yet when those reports turned out to be overstated, HCA
The pinnacle of this trend came at mid-year, when the Supreme Court largely upheld the key provisions of the Affordable Care Act. For hospital operators like Tenet, the good news was that expanded Medicaid coverage should provide revenue for uninsured patients who previously would have received treatment without paying anything. The change may result in a tug of war between Tenet and WellCare Health Plans
For Tenet to improve, it needs to make the most of new opportunities under health care reform, ideally before the rules change again. With hefty competition, though, Tenet faces an uphill climb if it wants to get 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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