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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Hartford Financial last year, the company has given back not just the point it gained from 2010 to 2011 but also another. Yet the stock has done reasonably well, rising about 20% over the past year.
The insurance industry has been a tough place to be over the past year or two. Although Hartford largely avoided big losses from Hurricane Irene last year, the company announced roughly $300 million in catastrophic losses during the second quarter, dealing with the same above-average trends that hurt fellow insurer Travelers (NYS: TRV) . It also still faces the same low interest rates that have held back investment income and squeezed margins ever since the Fed implemented its zero interest rate policy.
In the face of those adverse conditions, Hartford has taken some major steps toward transforming its business. While Genworth Financial (NYS: GNW) , Prudential (NYS: PRU) , and MetLife (NYS: MET) have stopped offering certain product lines for new investors, Hartford took the more dramatic step earlier this year of phasing out its annuity business and trying to find a buyer for its life insurance unit. Just last month, it succeeded, with Prudential agreeing to buy a Hartford unit that includes about 700,000 policies with face amounts of $135 billion. After having already made deals to sell its broker-dealer, retirement plan, and individual annuity distribution businesses, the trimmed-down Hartford will focus on the property and casualty insurance business, which is somewhat less exposed to the whims of the financial markets.
For Hartford to improve, it will have to use its new smaller size to its advantage in jockeying for new business and taking advantage of better pricing conditions in insurance underwriting. Without success there, Hartford will have trouble getting closer to perfection.
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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The article Has Hartford Financial Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns warrants on Hartford Financial. 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.