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 Anworth Mortgage (NYS: ANH) 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 Anworth Mortgage.
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 9
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Anworth Mortgage last year, the company has kept its five-point score for the third year in a row. The stock's price has fallen nearly 10% over the past year, needing the company's dividend in order to break into positive territory on a total return basis.
Mortgage REITs have been popular for years, because of the extremely low interest rates that the Federal Reserve has promoted. By borrowing at low rates and buying higher-yielding mortgage-backed securities, Anworth is able to use leverage to produce impressive dividend yields.
More recently, though, Anworth and its peers have had to deal with worsening conditions in the industry. Because of tighter spreads, dividend cuts have become par for the course, with Annaly Capital (NYS: NLY) cutting its dividend by a third over the past few years and Chimera Investment (NYS: CIM) chopping its payout five times in the past two years. Anworth cut its dividend in late September, marking the fourth drop in five quarters for the REIT.
The big question for Anworth going forward is whether a wave of consolidation will hit the mortgage-REIT industry. With Annaly having recently agreed to buy out Crexus Investment (NYS: CXS) , some speculate that big players like Annaly and American Capital Agency (NAS: AGNC) could start sweeping in to buy smaller REITs like Anworth.
For Anworth to improve, it needs the interest rate situation to get more favorable, perhaps by having the Federal Reserve stop targeting mortgage-backed securities for its quantitative easing program. Absent that shift, Anworth may need to hope for a buyout offer to achieve the perfect result for its shareholders.
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.
Both Anworth and Annaly Capital have a history of paying huge dividends to shareholders. But with Annaly, there are some crucial issues investors have to understand about its business model before deciding whether it's a buy. In our brand-new premium research report on the company, our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of their strategy. Click here now to claim your copy.
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The article Has Anworth Mortgage Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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