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 Career Education (NAS: CECO) 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 Career Education.
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 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Career Education last year, the company has lost two points, with year-ago profits having turned into losses. The stock has given investors much larger losses, though, with shares having dropped more than 60% over the past year.
As a for-profit educational institution, Career Education is right in the middle of one of the worst sectors in the market lately. With many institutions getting criticism from federal officials for having high student-loan default rates among enrollees and graduates, investor sentiment within the space is near an all-time low. Moreover, students are defecting, with Apollo Group's (NAS: APOL) University of Phoenix, DeVry (NYS: DV) , and ITT Educational Services (NYS: ESI) seeing double-digit percentage declines in enrollment over the past year. For its part, Career Education recently closed 23 schools and laid off 900 employees.
But Career Education has one thing going for it that many other for-profit education companies lack: cash. The company had $373 million in cash as of last September, or about $5.56 per share. Given that the stock trades at just $3.25 per share, investors clearly expect it to burn through that cash rather than simply return it to shareholders. If it doesn't, then Career Education investors are essentially looking at free money.
Still, with Apollo facing potential issues about its accreditation and ITT having had to pay student lender Sallie Mae (NAS: SLM) $46 million to settle a dispute, for-profit education companies are getting financially weaker, setting the stage for a potential shakeout in the industry. If that happens, Career Education may be in the best condition to weather the storm and climb back to profitability in the long run. That won't make the stock perfect, but it'll get Career Education moving in the right direction again.
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.
Don't settle for second-best stocks. To find the best prospects in the market, let Motley Fool co-founder David Gardner show you the way. His picks of revolutionary stocks with disruptive potential have crushed the market, and he's offering an exclusive personal tour of his Supernova service for a limited time. Don't wait -- click here and see what Supernova has to offer you.
Click here to add Career Education to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has Career Education Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned, and neither does The Motley Fool. 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.