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 Hartford Financial (NYS: HIG) 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 Hartford Financial.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
When we looked at Hartford Financial last year, it could only manage four points. A higher dividend yield accounts for the improvement, and improvements on valuation and returns on equity are evident as well -- especially as the stock's price has fallen, reducing its earnings multiple.
Hartford suffered greatly during the financial crisis. Just as peers Lincoln National (NYS: LNC) and Manulife Financial (NYS: MFC) felt the pain of falling financial markets, Hartford's wealth management division took big losses from the market meltdown. But Hartford has since recovered to return to profitability.
Nevertheless, it's been a lousy year for insurance companies overall. The disastrous earthquake and tsunami in Japan had a big impact on MetLife (NYS: MET) and also hit shares of Aflac (NYS: AFL) . Allstate (NYS: ALL) and Travelers (NYS: TRV) have suffered from weather-related events throughout the year, with Allstate taking it particularly hard. But Hartford recently got good news when Hurricane Irene turned out not to be as costly as some had believed it would be.
Hartford has made a lot of progress from its near-death experience in 2008 and early 2009, but it still has plenty of work to do before it can aspire to perfection. The slight recovery in its dividend payout is a vital first step, and if the company can push margins up and get sales growth back on track, Hartford could easily look a lot more like a perfect stock in the years to come.
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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At the time thisarticle was published
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