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 Wynn Resorts (NAS: WYNN) 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 Wynn Resorts.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||35.3%||Pass|
|1-Year Revenue Growth > 12%||37.4%||Pass|
|Margins||Gross Margin > 35%||72.6%||Pass|
|Net Margin > 15%||10.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||108.8%||Fail|
|Current Ratio > 1.3||1.66||Pass|
|Opportunities||Return on Equity > 15%||24%||Pass|
|Valuation||Normalized P/E < 20||32.45||Fail|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Wynn started paying a regular dividend in May 2010. Total score = number of passes.
Since we looked at Wynn Resorts last year, the casino giant has put on a couple of extra points. Stronger gross margins and a big boost on returns on equity brought Wynn to the midpoint of our scale, and implementing a regular dividend not only helps investors but gives more general confidence about the company's stability going forward.
Wynn is based in Las Vegas, but its lifeline in the past several years has been thousands of miles away in the burgeoning Asian gaming market. Alongside Las Vegas Sands (NYS: LVS) and Melco Crown (NAS: MPEL) , Wynn has turned Macau into a goldmine, giving it a huge advantage over more domestically focused companies like MGM Resorts (NYS: MGM) and Boyd Gaming (NYS: BYD) .
But some storm clouds may be on the horizon for Wynn. Its most recent earnings report revealed slowing growth in Macau's main peninsula, and with Las Vegas Sands and Melco having a big head start in the hot Cotai Strip area of the former Portuguese colony, Wynn has its work cut out for it.
Even as its focus has shifted overseas, what would do Wynn a world of good would be to see its Las Vegas core finally recover from a deep recession. If that happens, then the resulting benefits for Wynn could push it much higher toward a perfect 10.
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 the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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