Has Health Management Associates 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 Health Management Associates (NYSE: HMA  ) 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 Health Management Associates.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

9.1%

Fail

 

1-year revenue growth > 12%

18.9%

Pass

Margins

Gross margin > 35%

47.5%

Pass

 

Net margin > 15%

2.2%

Fail

Balance sheet

Debt to equity < 50%

385.6%

Fail

 

Current ratio > 1.3

1.58

Pass

Opportunities

Return on equity > 15%

21.6%

Pass

Valuation

Normalized P/E < 20

13.88

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 Health Management Associates last year, the company has held onto its five-point score. The stock has also stayed relatively flat, gaining just a few percent over the past year.

Health-care reform has created winners and losers throughout the industry. For health insurance companies, the Affordable Care Act has mixed impacts, as mandatory insurance increases customer counts but other provisions force insurers to broaden coverage. For hospital operator HMA, as well as peers Community Health Systems (NYSE: CYH  ) and Tenet Healthcare (NYSE: THC  ) , Obamacare is an unqualified positive as it should eliminate the huge burden of uninsured patients that HMA has to serve with little or no reimbursement. That's why the result of the presidential election was so positive for the stock.

But just last week, HMA's stock took a big hit after 60 Minutes featured the company in a story that alleged that the company put pressure on doctors to admit more patients to boost profits. Yet similar controversies in the past haven't always ended badly for the company involved; HCA Holdings (NYSE: HCA  ) faced a Justice Department investigation earlier this year over allegations that it performed medically unnecessary heart procedures, yet its stock has soared in the interim. That said, with UnitedHealth Group (NYSE: UNH  ) and others supporting programs that give incentives to reduce hospital admissions, any hint of artificially hiking health-care costs is a big problem right now.

For HMA to improve, it needs to put these allegations to rest and focus on getting its extremely high debt levels down. If it can do that, the positive impacts of health-care reform could make the stock look a lot healthier in the years to come.

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.

HMA may benefit from the Affordable Care Act, but shares of UnitedHealth and other health insurers fell immediately when the Supreme Court upheld the law. Is Obamacare a death knell for health insurers, or is the market missing out on some of the opportunities the law presents? In this brand new premium report on UnitedHealth, we take the long term view, honing in on prospects for UnitedHealth in a post-Obamacare world. The report also comes with a full year of analyst updates to keep you covered as key news develops, so don't miss out -- simply click here now to claim your copy today.

Click here to add Health Management Associates to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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