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?
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.
- Moneymaking 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 Fidelity National Financial.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 5.7% | Fail |
| 1-year revenue growth > 12% | 48.8% | Pass | |
| Margins | Gross margin > 35% | 58.3% | Pass |
| Net margin > 15% | 8.4% | Fail | |
| Balance sheet | Debt to equity < 50% | 28.3% | Pass |
| Current ratio > 1.3 | 2.97 | Pass | |
| Opportunities | Return on equity > 15% | 14.4% | Fail |
| Valuation | Normalized P/E < 20 | 10.62 | Pass |
| Dividends | Current yield > 2% | 2.6% | Pass |
| 5-year dividend growth > 10% | (13.5%) | Fail | |
| Total score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Fidelity National Financial last year, the company has picked up a point, as its revenue climbed sharply compared with last year’s contraction. The stock has jumped 45% over the past year as a reawakening in the housing market helped boost its prospects.
Fidelity National Financial Inc (NYSE:FNF) is a major player in the title insurance business. That business has struggled in recent years as the housing bust took a long time to play itself out. But now, as the housing market has finally seemed to hit bottom, buying activity has started picking up. With title insurance a required component of most mortgage-financed purchases, Fidelity National Financial Inc (NYSE:FNF) rival First American Financial Corp (NYSE:FAF) has seen a dramatic improvement in the company’s fundamentals, and both First American and Fidelity have benefited from the greater transaction-based income that healthy homebuying activity produces.
But at the beginning of the year, Fidelity National Financial Inc (NYSE:FNF) took a turn in a completely different direction, acquiring Digital Insurance. With Digital’s employee-benefits management and health-insurance distribution business serving more than 20,000 small and midsized businesses, Fidelity believes it can unify a fragmented industry. AFLAC Incorporated (NYSE:AFL) has certainly found success in serving business customers with supplemental health insurance, and by focusing on modestly sized businesses with overburdened HR departments, Digital could give Fidelity a whole new profit center for growth.
For Fidelity to keep improving, it needs to maintain its favorable valuation while making the most of the opportunity that Digital represents. If housing keeps soaring, the improvement in its core title business will just be icing on the cake for Fidelity investors.
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.
The article Has Fidelity National Financial Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Aflac and First American Financial.
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