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 MBIA (NYS: MBI) 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 MBIA.
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%
1 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at MBIA last year, the company has lost three full points, with profits turning into losses. Yet after a roller-coaster ride for the shares, MBIA's stock has actually posted a small gain in the past year.
MBIA has been under fire for a long time, as its two main businesses, municipal bond insurance and insuring asset-backed securities, got crushed during the financial crisis. Ever since then, companies in the industry have struggled, with Ambac Financial having declared bankruptcy and peers Radian Group (NYS: RDN) and MGIC Investment (NYS: MTG) remaining under extreme pressure to recover.
But things have started to look better for the industry. Assured Guaranty (NYS: AGO) has seen strength in its municipal bond insurance businesses lately, as the anticipated crisis in municipal government finance hasn't taken shape as quickly as some feared. At the same time, MGIC, Radian, and Genworth Financial (NYS: GNW) have all noted higher volume in mortgage insurance.
Still, MBIA isn't out of the woods yet. Earlier this week, the New York State Department of Financial Services said it might force the company to delay making an interest payment on its debt. The news sent shares plunging even though the event wouldn't constitute a formal default.
For MBIA to recover fully, it needs both for conditions in the industry to keep improving and for it to get its own company-specific problems resolved. If it can do so, then MBIA has plenty of potential upside.
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 Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.
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