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 and then decide whether Mattel
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. Although 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 a 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.
- Moneymaking 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 Mattel.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 2.7% | Fail |
| 1-Year Revenue Growth > 12% | 7.3% | Fail | |
| Margins | Gross Margin > 35% | 50.5% | Pass |
| Net Margin > 15% | 11.4% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 47.7% | Pass |
| Current Ratio > 1.3 | 2.65 | Pass | |
| Opportunities | Return on Equity > 15% | 26.5% | Pass |
| Valuation | Normalized P/E < 20 | 18.12 | Pass |
| Dividends | Current Yield > 2% | 3.4% | Pass |
| 5-Year Dividend Growth > 10% | 16.2% | Pass | |
| Total Score | 7 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Mattel plays a good game with its score of 7 points. But its weakness has been slowing growth, and it's unclear where the company will find more revenue going forward.
As a major toymaker, Mattel is known for its trademark Barbie dolls. Yet increasingly, the company relies on licensing deals for other companies' characters. For instance, last year, Mattel got a big boost from sales of Disney
Where Mattel is falling behind is in developing new revenue streams. Rival Hasbro
Still, Mattel is trying. Earlier this year, it announced a licensing agreement with THQ
Keep searching
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.
Add Mattel to My Watchlist , which can find all of our Foolish analysis on it and all your other stocks.
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.
