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 LabCorp (NYS: LH) 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 LabCorp.
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%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at LabCorp last year, the company has picked up a point. Some improvement in the company's balance sheet is responsible for the score gain, but a 15% drop in the shares over the past year hasn't made investors particularly happy.
LabCorp provides a wide variety of clinical testing services, ranging from routine tests to specific disease tracking. So far, it's done a good job of holding off rivalQuest Diagnostics (NYS: DGX) , despite Quest's big run of acquisitions recently that include both Celera and Athena.
The national scope that LabCorp and Quest have does a good job of deterring would-be entrants to the industry. But some smaller competitors are chasing after LabCorp. Bio-Reference Labs (NAS: BRLI) is a regional player that has seen strong growth in its women's health and oncology divisions, while some private companies also serve the industry.
One thing that sets LabCorp apart is its relationship with UnitedHealth Group (NYS: UNH) , which it extended through the end of 2018. With the company having expected back in late 2006 that the partnership would generate $3 billion in revenue over the ensuing decade, the deal clearly puts LabCorp in a strong position.
For LabCorp to keep improving, it needs to make additional deals with big insurers like UnitedHealth. If it can succeed with that, then LabCorp could get the big revenue boost it needs to get closer to perfection in the years ahead.
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.
LabCorp 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 hereto add LabCorp to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bio-Reference Laboratories. Motley Fool newsletter services have recommended buying shares of Quest Diagnostics, UnitedHealth Group, and LabCorp, as well as creating a diagonal call position in UnitedHealth Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.