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 News Corp.
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 News Corp.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 5.7% | Fail |
| 1-Year Revenue Growth > 12% | 0.7% | Fail | |
| Margins | Gross Margin > 35% | 36.5% | Pass |
| Net Margin > 15% | 9.0% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 53.0% | Fail |
| Current Ratio > 1.3 | 2.30 | Pass | |
| Opportunities | Return on Equity > 15% | 11.2% | Fail |
| Valuation | Normalized P/E < 20 | 13.61 | Pass |
| Dividends | Current Yield > 2% | 1.0% | Fail |
| 5-Year Dividend Growth > 10% | 2.9% | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only a score of 3, News Corp. wasn't exactly making headlines with its financials. Unfortunately, controversy has snagged the media company, and what once seemed like an industry colossus now looks very vulnerable.
News Corp. combines an extremely attractive set of media properties. It has treaded water with newspaper offerings such as the New York Post and The Wall Street Journal along with a variety of other papers around the world, where it has struggled along with paper-centered companies such as New York Times
Until news of the company's phone-hacking scandal emerged, News Corp. and its CEO, Rupert Murdoch, were in a position of immense strength within the industry. But since the scandal, shares have plummeted, and the company has made what appear to be serious mistakes in mishandling everything from inquiries from Britain's Parliament to backing executives who have since resigned.
It's too early to tell how News Corp. will emerge from the scandal. But it's important to remember that based on financial numbers from before this happened, the company wasn't all that close to perfection. Unless you have a penchant for catching falling knives, News Corp. is probably worth changing the channel on, at least for now.
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 News Corp. 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.
