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 ( MTG ) 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%
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 Radian Group ( RDN ) and mortgage-bond insurer MBIA ( MBI ) have been under a lot of pressure, while PMI Group recently filed for bankruptcy after state regulators seized its mortgage-insurance unit . Ambac Financial has been in bankruptcy for quite a while, and even larger, more diversified companies like Genworth Financial ( GNW ) and AIG ( AIG ) took hits from bad conditions in the mortgage insurance business .
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 to come.
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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