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 Apollo Group Inc (NASDAQ:APOL) fits the bill.
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 Apollo Group Inc (NASDAQ:APOL).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 7.8% | Fail |
| 1-year revenue growth > 12% | (9.2%) | Fail | |
| Margins | Gross margin > 35% | 57% | Pass |
| Net margin > 15% | 9.8% | Fail | |
| Balance sheet | Debt to equity < 50% | 9.6% | Pass |
| Current ratio > 1.3 | 1.38 | Pass | |
| Opportunities | Return on equity > 15% | 31.7% | Pass |
| Valuation | Normalized P/E < 20 | 4.73 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Apollo Group last year, the company has kept its five-point score. But the stock has posted a failing grade, losing 60% of its value over the past year.
Throughout the for-profit education industry, companies have gotten hit hard by the threat of greater government regulation. Last summer, the Department of Education said it planned to review recent paperwork from Apollo to make sure it followed federal financial aid rules. Other companies have undergone similar investigations, with ITT Educational Services , Inc. (NYSE:ESI) and Corinthian Colleges Inc (NASDAQ:COCO) both having had to endure a Consumer Financial Protection Bureau examination, while Bridgepoint Education Inc (NYSE:BPI) was the subject of a Justice Department inquiry.
By some measures, though, Apollo’s University of Phoenix has seen the biggest impact, as enrollment figures for the leading educator have fallen dramatically. As of its most recent quarterly figures, Apollo had suffered a 14% drop in total enrollment — or more than 50,000 students — with new enrollment figures down 15%. Corinthian and ITT have also seen declines, although Bridgepoint actually gained students last year.
Unfortunately, Apollo has drawn criticism for boosting its marketing budget to try to get enrollment back up. With University of Phoenix’s online ad spending topping the industry on two recent looks during December and January, fellow Fool Kevin Chen fears that Apollo and its peers mistakenly believe that marketing can build enrollment even in a tight job market in which the payoff from a degree isn’t guaranteed.
For Apollo to improve, it needs to get past the threat of regulation and seek ways to come up with a more palatable business model for students, regulators, and the company. With shares at such low levels, success could result in a huge payoff for shareholders — but failure could be fatal to Apollo’s chances of ever approaching perfection.
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 Apollo Group Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger owns shares of Bridgepoint Education. The Motley Fool recommends Bridgepoint Education. The Motley Fool owns shares of Bridgepoint Education.
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