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 athenahealth
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 athenahealth.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 34.1% | Pass |
| 1-Year Revenue Growth > 12% | 34.4% | Pass | |
| Margins | Gross Margin > 35% | 61.7% | Pass |
| Net Margin > 15% | 5.2% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 4.12 | Pass | |
| Opportunities | Return on Equity > 15% | 8.4% | Fail |
| Valuation | Normalized P/E < 20 | 129.82 | Fail |
| 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.
Since we looked at athenahealth last year, the company has kept its five-point score. But shares of the health-care business services company have soared about 75% in the past year as the need for its services has risen sharply in light of new regulation.
Health-care reform laws have brought the need for health-care providers to cut costs wherever they can. One promising area that has gotten a lot of attention is electronic medical records, where Cerner
Despite those big players, though, smaller companies like athenahealth have found lucrative niches. While Merge Healthcare
With its Internet-based software, athenahealth's products are easier to maintain than those that require on-site IT support. But in addition, analysts have pointed to the company's practice of getting paid based on a percentage of collections as aligning athenahealth's interests with those of its physician customers. That's a powerful incentive for customers to try its products.
Unfortunately, athenahealth's cloud focus has given the stock a cloud-like valuation. Even with projections of nearly 30% growth over the next five years, the stock will really have to keep besting expectations to justify the current share price.
For athenahealth to keep improving, it needs to focus on growth at all costs. Only once it has established its leadership position in the space can it then look to the other elements of becoming a perfect stock.
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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