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 DreamWorks Animation (NAS: DWA) 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 DreamWorks Animation.
What We Want to See
Pass or Fail?
5-year annual revenue growth > 15%
1-year revenue growth > 12%
Gross margin > 35%
Net margin > 15%
Debt to equity < 50%
Current ratio > 1.3
Return on equity > 15%
Normalized P/E < 20
Current yield > 2%
5-year dividend growth > 10%
5 out of 9
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful because of negative normalized earnings. Total score = number of passes.
DreamWorks Animation hits the middle of our scale with five points. In a world that's increasingly demanding quality content, DreamWorks has an inroad that it can exploit if it's smart about capitalizing on the opportunity.
When you think about animation, the first name many think of is Disney (NYS: DIS) , especially given its buyout of Pixar some years ago. Yet DreamWorks is the studio behind the highest grossing animated movie of all time, Shrek 2. With more than $441 million in domestic box office receipts, the movie set the standard for sequel promotion.
DreamWorks is embracing new partnerships, though. It recently made an agreement with Chinese video siteYouku.com (NYS: YOKU) to distribute its Kung Fu Panda films. The agreement provides a strong entrance to what could become a very lucrative market, given that Kung Fu Panda 2 made $91.5 million in China. DreamWorks is also reportedly in talks with Netflix (NAS: NFLX) to get streaming rights for its animated content. It even partnered with Royal Caribbean to feature DreamWorks characters on its fleet of cruise ships.
The trouble, though, is that long-milked franchises like Shrek are getting long in the tooth, and DreamWorks doesn't have obvious follow-ups to replace their revenue. With Viacom (NYS: VIA) launching its own animation unit, competition will continue to be fierce.
DreamWorks has had an amazing run. If it can come up with new movie ideas that match their predecessors, then it could easily push upward toward perfection.
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 thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of DreamWorks Animation, Netflix, and Disney, as well as buying puts in Netflix. 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 adisclosure policy.
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