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 Assured Guaranty (NYS: AGO) 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 Assured Guaranty.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||39.3%||Pass|
|1-Year Revenue Growth > 12%||(19.3%)||Fail|
|Margins||Gross Margin > 35%||72.2%||Pass|
|Net Margin > 15%||41.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||21.9%||Pass|
|Current Ratio > 1.3||0.40||Fail|
|Opportunities||Return on Equity > 15%||15.1%||Pass|
|Valuation||Normalized P/E < 20||3.78||Pass|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||5.9%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, Assured Guaranty looks pretty favorable. But the score belies the huge battle that the company has fought ever since the mortgage crisis started.
Assured Guaranty provides insurance for bonds and various other obligations, including municipal bonds and mortgage-backed securities. Over the past several years, that's been a dangerous place to be, as both of those sectors have taken a huge beating. Competitor Ambac Financial filed for bankruptcy late last year, and MBIA (NYS: MBI) and Radian Group (NYS: RDN) have also struggled to make it through the tough environment.
One way that Assured Guaranty has been able to weather the storm is by collecting from the big banks that it claims did the insurer wrong. Bank of America (NYS: BAC) paid Assured Guaranty a $1.6 billion settlement over alleged bad mortgages, and Assured Guaranty filed suit against a subsidiary of JPMorgan Chase (NYS: JPM) making similar allegations.
Earlier this week, Assured Guaranty got what the market saw as good news: S&P chose to downgrade its debt by only two notches, from AA+ to AA-. Even with the downgrade, it's a far cry from MBIA's junk bond status.
Despite its fairly good score, Assured Guaranty is a huge gamble right now. With many waiting for the next shoe to fall in the credit markets, whether it comes from muni bonds or the housing market, only investors comfortable with risk should take a closer look at Assured Guaranty.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of JPMorgan Chase and Bank of America. 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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