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 Activision Blizzard (NAS: ATVI) 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 Activision Blizzard.
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 9
Source: S&P Capital IQ. NM = not meaningful; Activision Blizzard started paying a dividend in Feb. 2010. Total score = number of passes.
When we looked at Activision Blizzard last year, the company had a score of five; but last year, it got an extra point despite having just started paying a dividend, so for the most part the company's numbers look very similar to how they did last year. The game-maker has failed to reignite its growth in the past year, but margins widened somewhat and the company's valuation is somewhat more attractive.
Activision has been trapped in a struggling industry. Both 2009 and 2010 were weak years for sales of both hardware and software. But this year, things look like they might finally be starting to turn around, although modest sales gains at Activision and Electronic Arts (NAS: ERTS) stand in contrast to drops from Take-Two Interactive (NAS: TTWO) and THQ (NAS: THQI) .
One big change over the past year has been the emphasis on motion-tracking games. The success of Microsoft's (NAS: MSFT) Kinect has brought smaller players like Majesco Entertainment (NAS: COOL) into the forefront. But Activision is positioned better to take advantage of quickly growing emerging markets, with licensing partner NetEase.com (NAS: NTES) showing big success with Activision's World of Warcraft franchise.
For Activision, a lot is riding on next week's release of the latest installment of the Call of Duty series. With last year's Black Ops having sold a record $360 million in its first day, the new game's results will make or break Activision's holiday season. If it does well, then Activision could enter 2012 a whole lot closer to perfection than it is right now.
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. The Motley Fool owns shares of Take-Two, Activision Blizzard, and Microsoft, and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of NetEase.com, Microsoft, Activision Blizzard, and Take-Two, as well as creating a bull call spread position in Microsoft and a synthetic long position in Activision Blizzard. 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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