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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 Sony (NYSE: SNE ) 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 Sony.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||(0.1%)||Fail|
|1-year revenue growth > 12%||4.2%||Fail|
|Margins||Gross margin > 35%||24.2%||Fail|
|Net margin > 15%||1%||Fail|
|Balance sheet||Debt to equity < 50%||31.6%||Pass|
|Current ratio > 1.3||1.01||Fail|
|Opportunities||Return on equity > 15%||3.6%||Fail|
|Valuation||Normalized P/E < 20||10.57||Pass|
|Dividends||Current yield > 2%||1.1%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||2 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just two points, Sony is nowhere near perfect. The company has faced challenges beyond its control in the past month or two, but the problems at the electronics giant have gone on far longer than that.
Sony has a history of innovation, ranging from its introduction of the Walkman 30 years ago to its gaming systems today. Yet the company has lagged behind competitors Microsoft (Nasdaq: MSFT ) and Nintendo in the gaming space recently, as Microsoft's new Kinect controller has awakened interest in the Xbox franchise and led some Sony users to question their loyalty.
March's earthquake in Japan certainly didn't help the beleaguered manufacturer. And even more recently, the company's debacle in allowing hackers to penetrate its 77 million member PlayStation Network has hurt its reputation even further. With the likely theft of personal data and even credit card information from its customers, Sony won't be making any friends anytime soon.
Sony hasn't given up, though. The 3net 3-D television channel, which it worked on with partners IMAX (NYSE: IMAX ) and Discovery (Nasdaq: DISCA ) , hit the air earlier this year. But with retail sales of 3-D televisions not matching up to hopes, 3net may be another dead end for Sony.
Sony's past experience clearly demonstrates that it can come up with hits. The question, though, is when the next one will come. Until it does, Sony will continue to struggle to survive its missteps.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.