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.
What We Want to See
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.
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.
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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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