Every investor would love to stumble upon the perfect stock.
But will you ever really find a stock that provides
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
) 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:
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.
Higher sales mean nothing if a company can't produce profits
from them. Strong margins ensure that company can turn revenue
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
Return on equity helps measure how well a company is finding
opportunities to turn its resources into profitable business
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.
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
With those factors in mind, let's take a closer look at MGIC
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%
||1 out of 9
Source: S&P Capital IQ. NM = not meaningful due to
negative earnings. Total score = number of passes.
With only a single point, MGIC Investment doesn't put much of
a roof over your portfolio's head. The private mortgage insurer
found itself in the wrong business at the wrong time, but some
are looking for a rebound in the beaten-down shares.
If you don't have enough money to
make a big down payment
when you buy a home, you need to get mortgage insurance to
protect your bank from a possible default. That's where MGIC
comes in, offering private mortgage insurance designed to make
the bank whole if it has to foreclose on your home and can't sell
it for enough to cover the outstanding balance on your loan.
During the collapse in the housing market, that's been a
terrible place to be. Both MGIC and peers like fellow insurer
) and mortgage-bond insurer
) have been under a lot of pressure, while
recently filed for bankruptcy after
state regulators seized its mortgage-insurance
has been in bankruptcy for quite a while, and even larger, more
diversified companies like
) took hits from
bad conditions in the mortgage insurance
But over the past month, MGIC has staged a comeback. A couple
weeks ago, the company said that
homeowner delinquencies fell slightly
during November. Then last week, news of a possible rebound for
home prices pushed both Radian and MGIC shares higher.
MGIC's current financials reflect a terrible past, but if the
company can just survive until a true housing rebound takes hold,
then it should see those numbers get a lot better. MGIC may never
be a perfect stock, but it should look a lot better in the years
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.
to add MGIC Investment to My Watchlist, which can find all
of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful
investment strategy. Get the big picture by taking a look at
13 Steps to Investing Foolishly
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