Has Assured Guaranty Become the Perfect Stock?

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 Assured Guaranty (AGO 1.40%) 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 Assured Guaranty.

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Assured Guaranty last year, the company has dropped two points. The dividend has risen sharply, but drops in revenue and profitability caused the overall score decline. The shares have held up somewhat better, rising a bit more than 10% over the past year.

Assured Guaranty was in exactly the wrong place at the wrong time during the financial crisis, with its business focused on insurance for municipal bonds and mortgage-backed securities. The mortgage meltdown in particular was largely responsible for pushing Ambac Financial into bankruptcy, and only recently has peer Radian Group (RDN 0.67%) started to perk up substantially. MGIC Investment (MTG 0.74%) and Genworth Financial (GNW 1.45%) are still struggling despite signs of recovery.

But in the muni-bond realm, events earlier this year raised new concerns. As big municipal bankruptcies in several cities in California gained attention, investors worried more about muni-bond insurance liability. That's been a big part of what's held MBIA (MBI 1.24%) down, although the troubles definitely haven't escalated into anything close to the catastrophe that analyst Meredith Whitney predicted a couple of years ago.

Still, Assured Guaranty has done a lot better than its peers. Smart risk-taking helped insulate it from the worst of the losses. Yet now, the only thing survival has ensured is that new competitors are taking the playing field, unencumbered by adverse histories and instead carrying clean slates.

For Assured Guaranty to improve, it needs nascent signs of economic strength to continue taking hold and gaining more traction in the months and years ahead. Only good loss experience will help Assured Guaranty get back to profitability in the long run.

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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