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 Melco Crown (NAS: MPEL) 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 Melco Crown.
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: S&P Capital IQ. Total score = number of passes.
When we looked at Melco Crown last year, it only managed to score three points. Since then, the company has seen big improvements in margins and return on equity, although Melco has seen its balance sheet health deteriorate somewhat.
Melco pegs its huge revenue growth to the booming gaming market in Macau. The casino operator has thrived alongside Las Vegas Sands (NYS: LVS) , first at the tip of the Macau Peninsula and more recently on the newly developing Cotai Strip. With competitors Wynn Resorts (NAS: WYNN) and MGM Resorts (NYS: MGM) having been a bit slow to see the Cotai trend, Melco could retain a competitive advantage for some time.
What Melco gives you, though, is a much smaller play on the gaming trend. Sands, Wynn, and MGM all have massive operations in Las Vegas and elsewhere, which tend to water down the huge Asian growth that the gaming industry has seen. Melco represents the best pure-play investment on Macau.
Of course, that cuts both ways. With fears of a global slowdown centered on China, Melco's concentrated strategy could backfire. Just as local U.S. casino companies Penn National (NAS: PENN) and Boyd Gaming (NYS: BYD) have their fortunes tied to their local markets, problems in the Chinese economy could stunt Melco's prospects.
For now, though, Melco continues to enjoy strong growth. With a high valuation, no dividend, and still-mediocre net margins and returns on equity, though, Melco has a long way to go to reach 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 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. 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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