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 Gannett (NYS: GCI) 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 Gannett.
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.
Since we looked at Gannett last year, the company has picked up a point. The publisher continues to see falling revenue, but its debt-to-equity ratio has fallen and it has made two huge dividend boosts in the past year.
The newspaper business has looked like the buggy-whip industry for some time, as news consumption has increasingly moved to the Internet. That's forced big newspapers to change their business models drastically, as the old model of selling print advertising has steadily dried up in the face of heightened competition.
Gannett recently joinedTheNew York Times (NYS: NYT) and News Corp. (NAS: NWS) in instituting pay-walls for most of its publications. New York Times has enough success with the plan that it has cut its number of free article-views in half. But despite pressure from investor Warren Buffett, Washington Post (NYS: WPO) doesn't plan to institute a pay wall, and Gannett's USA Today currently comes pay-wall free as well.
Last month, Gannett disappointed investors with a poor quarterly report. The company's move toward trying to boost online revenue has borne some fruit, but overall, it hasn't been able to staunch the flood of falling overall sales. During the quarter, profits fell by around 25%, due largely to advertising revenue declines.
With the rise of the iPad as a news-consumption device, Apple (NAS: AAPL) could be the key to Gannett's success in the future. With news apps becoming an increasingly important driver of readership, Gannett is a logical choice to bring its colorful and easy-to-read style to iPad readers. If it can succeed in making money in that arena, then Gannett could be able to turn itself around in the coming years.
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 in this article. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. 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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