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 Hasbro (NAS: HAS) 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 Hasbro.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Hasbro last year, the company has picked up a point. A 20% decline in the stock has helped bring valuations down, but a rising dividend has pushed its yield above the 4% mark.
Hasbro is a big player in the toy industry, alongside rival Mattel (NAS: MAT) . While Mattel has Barbie, Fisher-Price, and American Girl in its lineup, Hasbro boasts the Monopoly board game as well as Transformers, Nerf, and Milton Bradley.
Lately, Hasbro and many of its peers have struggled to make investors happy. In its most recent quarter, Hasbro's sales slipped 3%, with a huge 16% decline in North American revenue. Earnings also came up short for the fourth time in five quarters. Mattel and JAKKS Pacific (NAS: JAKK) also fell short of expectations, with JAKKS in particular reporting a wider than expected loss for the quarter. Hasbro hopes to recover with some movie releases, but Battleship is already out to mixed reviews, and G.I. Joe: Retaliation got pushed back from this month to March 2013.
One saving grace may come from Hasbro's deal with Electronic Arts (NAS: EA) to produce digital apps for its board games. As more growth in gaming moves away from conventional games toward electronic devices, Hasbro has to adapt in order to stay relevant.
Another big asset is Hasbro's licensing deal with Disney's (NYS: DIS) Marvel division. But the deal doesn't give it automatic rights to everything Marvel does, as Marvel recently gave Ubisoft the rights to produce a game based on the hit movie Avengers. Nevertheless, licensing rights will continue to be a big key to Hasbro's future success.
For Hasbro to improve, it needs to turn its assets into faster growth while paying down some of its debt load. If the company can make the transition to a more digitally oriented toy world, Hasbro could get a lot closer to perfection in the near future.
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 in this article. The Motley Fool owns shares of Walt Disney and Hasbro. Motley Fool newsletter services have recommended buying shares of Mattel, Hasbro, and Walt Disney, as well as creating a bear put spread position in Mattel. 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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