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 Pinnacle Entertainment (NYS: PNK) 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 Pinnacle Entertainment.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.8% Fail
  1-Year Revenue Growth > 12% 14.3% Pass
Margins Gross Margin > 35% 73.4% Pass
  Net Margin > 15% (3.2%) Fail
Balance Sheet Debt to Equity < 50% 243.4% Fail
  Current Ratio > 1.3 0.98 Fail
Opportunities Return on Equity > 15% 2.0% Fail
Valuation Normalized P/E < 20 72.91 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only two points, Pinnacle Entertainment doesn't look like a jackpot winner. The local casino operator doesn't have the same international connections that have made many of its larger peers look so good in recent years.

Pinnacle owns several casinos, mostly in the Mississippi River basin. Although many investors largely ignore companies outside of Las Vegas, the middle-American market has gotten increasingly competitive, with several players fighting to eke out profits as markets get closer together and start to cannibalize each other. In particular, Penn National (NAS: PENN) has distinguished itself as a big grower in the region, with an expansion into Las Vegas potentially being Penn's bridge to reach the next level.

But as its numbers indicate, Pinnacle has struggled to stay merely profitable, let alone advance to the top tier of gaming companies. Wynn Resorts (NAS: WYNN) and Melco Crown (NAS: MPEL) have their extensive Macau holdings to boost their growth rates, while Las Vegas Sands (NYS: LVS) has operations both in Macau and in Singapore, both of which have huge growth potential. But Pinnacle has to make do without the benefit of emerging-market tailwinds supporting its profits.

For Pinnacle to become a perfect stock, it first needs to demonstrate that it's financially viable. Currently, its high debt load and pricey valuation don't make it compelling, and until it can get its earnings up, Pinnacle doesn't belong in most investors' portfolios.

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.

Pinnacle may not be a perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

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

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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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