Has WellPoint Become the Perfect Stock?

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 WellPoint 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 WellPoint.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

0.2%

Fail

 

1-year revenue growth > 12%

1.6%

Fail

Margins

Gross margin > 35%

21.9%

Fail

 

Net margin > 15%

4.3%

Fail

Balance sheet

Debt to equity < 50%

65.3%

Fail

 

Current ratio > 1.3

1.78

Pass

Opportunities

Return on equity > 15%

11.3%

Fail

Valuation

Normalized P/E < 20

8.72

Pass

Dividends

Current yield > 2%

1.8%

Fail

 

5-year dividend growth > 10%

NM

NM

       
 

Total score

 

2 out of 9

Source: S&P Capital IQ. NM = not meaningful; WellPoint started paying a dividend in March 2011. Total score = number of passes.

Since we looked at WellPoint last year, the company has dropped a point for the second year in a row. The company's debt-to-equity ratio has worsened, and the stock has fallen nearly 10% over the past year.

The health insurance industry has seen huge changes in recent years, as the passage of the Affordable Care Act has led to enforced expansion of coverage combined with the potential for a huge boost in the potential customer base. WellPoint hopes that the new customers it will be able to pick up will more than offset any increase in liability from provisions requiring it to take patients with pre-existing conditions.

But the continuing weak economy in the U.S., especially in respect to poor employment figures, bodes ill for WellPoint and its peers. A couple months ago, UnitedHealth warned of pressure on earnings for 2013 because of a weak employment outlook. Aetna similarly weighed in by releasing guidance for 2013 that was below analyst projections, also citing the economy as a factor in slowing earnings growth. Even though Cigna expects to cut its annual medical costs per patient by 4%, it also gave lower-than-projected guidance for the coming year. WellPoint expects "relatively stable" earnings but still at levels below previous estimates.

Going forward, WellPoint's just-completed acquisition of Amerigroup will give it more exposure to health care patients covered under government programs like Medicaid, a highly coveted and competitive niche in the health insurance industry. UnitedHealth has the biggest market share in the space, but the combination of WellPoint and Amerigroup will challenge that supremacy.

For WellPoint to improve, it needs more results like its quarterly report yesterday, which showed growth on the earnings front rather than the year-over-year drop analysts were expecting. With a cautiously optimistic outlook, WellPoint has room to move higher if it can achieve its modest goals.

Keep searching
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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Click here to add WellPoint to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has WellPoint Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. 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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