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 Madison Square Garden (NAS: MSG) 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 Madison Square Garden.
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%
2 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only two points, Madison Square Garden looks like the Knicks on a really bad night. The owner of New York's premier arena has some great prospects, but it's also facing a bear of a crisis right now.
In early 2010, Cablevision (NYS: CVC) spun off MSG, which has a portfolio of lucrative properties. In addition to its namesake arena, MSG also owns hockey's New York Rangers and the WNBA team New York Liberty, as well as Radio City Music Hall and the Chicago Theatre, among others. The company makes money not just from its own teams but by hosting its venues for partners that include the Big East college basketball conference and wrestling giant WWE (NYS: WWE) .
Earlier this year, things looked great for MSG. The Knicks and Rangers were planning to raise ticket prices, and some new trades for star basketball players had reignited excitement about the team. Even though its growth rates lagged concert promoter Live Nation (NYS: LYV) , MSG is solidly profitable. The company even plans to make major renovations to the Garden, costing $850 million and taking three summers to complete.
Now, though, the NBA lockout poses a dire threat. The venue could lose $1 million per night if games end up being cancelled by a work stoppage.
All in all, MSG's woes won't last forever. Once the NBA threat passes and a new deal is reached, basketball revenue should put MSG back on its growth trajectory. It has a long way to go to reach perfection, but MSG could see some real upside in the years to come.
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 thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Madison Square Garden. 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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