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 Time Warner (NYS: TWX) 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 Time Warner.
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%
4 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With four points, Time Warner isn't impressing investors with its financials. With the Harry Potter movies having run their course, the entertainment company needs to search for its next blockbuster hit while defending its turf on the cable network front.
Over the past several years, Time Warner has stripped itself down to its media and entertainment roots. Having spun off both AOL (NYS: AOL) and Time Warner Cable (NYS: TWC) , what's left of Time Warner are its movie, television, and publishing businesses.
Now, the company is competing in the new frontier for content: on-demand streaming. Time Warner's HBO rolled out a proprietary streaming service, bypassing Netflix (NAS: NFLX) and Amazon.com (NAS: AMZN) by allowing existing subscribers to see HBO shows directly at no additional cost.
The larger problem, though, is whether the company can rely on its cable roots. Streaming can help on the content side, but to the extent that it leads viewers to cancel their cable subscriptions, it eats into network revenues. But Time Warner is making interesting moves to counter that trend, recently agreeing to a streaming arrangement with cable operator Cablevision Systems (NYS: CVC) that supplements its TV Everywhere partnership with Comcast (NAS: CMCSA) .
For now, Time Warner finds itself in the middle of a battle royale within the media industry. With shares on the cheap side and a good dividend, it could be a reasonable value play -- especially if you think that content-rich companies will win over companies trying to make money by delivering that content. Having now focused itself, Time Warner could in time get a lot closer to 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 contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Amazon.com and Netflix, as well as creating a bear put spread position 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 a disclosure policy.
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