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 The New York Times (NYSE: NYT ) 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 New York Times.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||(6%)||Fail|
|1-year revenue growth > 12%||(2%)||Fail|
|Margins||Gross margin > 35%||59.3%||Pass|
|Net margin > 15%||4.2%||Fail|
|Balance sheet||Debt to equity < 50%||144.8%||Fail|
|Current ratio > 1.3||1.80||Pass|
|Opportunities||Return on equity > 15%||15.2%||Pass|
|Valuation||Normalized P/E < 20||12.49||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of four, The New York Times won't have huge headlines proclaiming its perfection anytime soon. The company is knee-deep in what many call a dying industry, but it won't go down without a fight.
It's been a tough few years for newspaper stocks. Competition from online news sources as well as free classified-style services from Craigslist and eBay (Nasdaq: EBAY ) has led to falling revenue for many companies in the industry. Gannett (NYSE: GCI ) , which owns USA TODAY, has seen similar sales drops. Other newspaper companies, including Washington Post (NYSE: WPO ) and McClatchy (NYSE: MNI ) , have held up their revenue on the back of other non-newspaper-related businesses, such as WaPo's Kaplan educational unit and McClatchy's minority investment interest in CareerBuilder.com and other websites.
But The New York Times is going up against the free-news Internet culture. After long consideration, the company finally implemented a paywall for its online content, allowing readers to see a certain number of articles free of charge but then requiring a subscription for subsequent access. It tried and abandoned a similar strategy a few years ago, but last week, the company replaced its executive editor, showing its commitment to its new digital strategy.
At the pace at which the news industry is changing with the times -- witness News Corp.'s (Nasdaq: NWS ) Daily for Apple's iPad -- legacy publishers like The New York Times are having trouble keeping up. But as long as traditional journalism survives, The New York Times will have its reputation helping it in its striving toward perfection.
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.
Click here to add New York Times 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."