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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether World Wrestling Entertainment (NYSE: WWE ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many areas, which come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 World Wrestling Entertainment.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.2%||Fail|
|1-Year Revenue Growth > 12%||(2.2%)||Fail|
|Margins||Gross Margin > 35%||46.2%||Pass|
|Net Margin > 15%||12.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.9%||Pass|
|Current Ratio > 1.3||3.78||Pass|
|Opportunities||Return on Equity > 15%||16.8%||Pass|
|Valuation||Normalized P/E < 20||17.79||Pass|
|Dividends||Current Yield > 2%||12.0%||Pass|
|5-Year Dividend Growth > 10%||24.6%||Pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With World Wrestling Entertainment coming in with a score of 7, you might wonder whether the rumors you've heard about the legitimacy of professional wrestling are true. But despite its attractive metrics, the company has faced challenges lately.
As you'd expect, some of WWE's problems have come from the struggling economy. With discretionary income down, revenue has been hard to come by. But the company has responded with big cost-spending measures that have kept net income up so far.
In addition, the company is doing its best to leverage the brand it has created. Licensing deals with Mattel (Nasdaq: MAT ) and video-game maker THQ (Nasdaq: THQI ) hold the potential for a steady stream of income with which to support WWE's huge dividend.
In the long run, bulls can point to rebounds in casino stocks, as well as higher attendance at theme-park operator Cedar Fair's (NYSE: FUN ) properties, as evidence that consumers will eventually start spending on entertainment again. In the meantime, though, shareholders can expect the occasional body-slam. Just last week, the company announced that earnings for its fourth quarter could be cut as much as half from where analysts expected.
What's most attractive about this stock is its huge dividend. As long as WWE picks itself up off the mat and stays in the ring, investors can expect to see the stock continue fighting toward perfection like Stone Cold Steve Austin in a celebrity cage deathmatch.
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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