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 World Wrestling Entertainment (NYS: WWE) 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 World Wrestling Entertainment.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.9%||Fail|
|1-Year Revenue Growth > 12%||4.5%||Fail|
|Margins||Gross Margin > 35%||38.7%||Pass|
|Net Margin > 15%||8.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.6%||Pass|
|Current Ratio > 1.3||4.43||Pass|
|Opportunities||Return on Equity > 15%||13.0%||Fail|
|Valuation||Normalized P/E < 20||18.34||Pass|
|Dividends||Current Yield > 2%||4.9%||Pass|
|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 World Wrestling Entertainment last year, the professional wrestling exhibitor has lost two points. A big dividend cut is the primary reason for the drop, although falling returns on equity also contributed.
The slow economy over the past several years hasn't done World Wrestling Entertainment any favors. A general lack of disposable income among customers has kept revenue growth relatively slow compared to past economic boom times.
But the company has pulled out all the stops in order to try to keep its profitability up. Cost-cutting measures have helped keep net income up, and live events remain a primary profit center. Its 25th annual Survivor Series helped bail out Madison Square Garden (NAS: MSG) during a tough time for the stadium company, as the NBA lockout eliminated 16 games from the normal regular season.
Moreover, the company has identified some secondary sources of revenue. Its sales of action figures and related toys improved when it ended a partnership with JAKKS Pacific (NAS: JAKK) in favor of Mattel (NAS: MAT) , and WWE also profits from a licensing deal with game-maker THQ (NAS: THQI) .
For WWE to get back toward perfection, it needs to get past its big dividend cut and focus on the innovations that got it to where it is today. By tapping into a sports-hungry population that has latched onto mixed martial arts, WWE could return to its former glory.
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. The Motley Fool owns shares of Madison Square Garden. Motley Fool newsletter services have recommended buying shares of Mattel. 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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