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 MGIC Investment 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 MGIC Investment.
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%
0 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at MGIC Investment last year, the company hasn't even been able to hold onto the single point it scored last year. The stock has done even worse, falling about 40% over the past year.
The mortgage insurance industry was extremely lucrative during the mid-2000s, as the housing boom made the business seem like it was making free money. When the bottom fell out of the housing market, though, insurers suddenly had to make good on their commitments. That helped send Ambac Financial into bankruptcy and push MGIC, Radian Group , and Genworth Financial sharply lower.
MGIC has managed to get a lifeline from government-sponsored enterprises Fannie Mae and Freddie Mac. The mortgage insurer has gotten waivers to maintain lower than usual capital reserves, allowing it to keep doing business in most states. Yet investors shouldn't count on those waivers continuing indefinitely, as past cases like that of Old Republic subsidiary Republic Mortgage Insurance show that those waivers can disappear at a moment's notice.
Still, losses have had investors nervous about MGIC. With far-worse-than-expected results in the past two quarters, MGIC is expected to keep losing money at least through 2013, even as the rebounding housing market has led some to believe that the industry could finally turn around. With Bank of America and other banks starting to ramp up on lending activity again, the key will be whether the loans they make are better in quality than they were during the housing boom.
For MGIC to improve, it needs to get itself back on the road to profitability. That will take time, but if the housing market recovers, then MGIC should see its financial results improve -- as long as it's able to survive its short-term difficulties.
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 MGIC Investment 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 Bank of America. 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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