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 Penn National Gaming (NAS: PENN) 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 Penn National Gaming.
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.
With four points, Penn National Gaming isn't the big jackpot winner of our search for the perfect stock. The regional casino company looks a lot different from some of its international counterparts, but it's starting to benefit from improved conditions.
When investors think of casinos, their minds go across the Pacific to the high-growth Asian market, where giants like Las Vegas Sands (NYS: LVS) , Melco Crown (NAS: MPEL) , and Wynn Resorts (NAS: WYNN) have built new empires. By contrast, Penn's focus on the U.S. market is a lot less flashy, especially during recent years in which both Las Vegas and more local markets have struggled. Even as the tide turns domestically, companies like Penn still don't draw as much attention.
Penn has stood out from its domestic peers, though, posting much stronger returns for shareholders than competitors Boyd Gaming (NYS: BYD) , Ameristar Casinos (NAS: ASCA) , and Pinnacle Entertainment (NYS: PNK) . In its most recent quarter, Penn sported sales growth of 11%, which led to 27% higher adjusted EBITDA and analyst-topping earnings. The company's recent bargain pickup of M Resort in Las Vegas represents a coup that could push Penn closer to the big leagues.
Still, Penn has a lot of work to do to reach perfection. With razor-thin margins that don't match up to those of Wynn and Sands, Penn needs either to build volume or to find higher-margin ways to make money. If the economy cooperates, then Penn could easily make some progress in the years ahead.
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 Ameristar Casinos. 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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