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 Washington Post Co.
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 Washington Post.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 3.9% | Fail |
| 1-Year Revenue Growth > 12% | (2.5%) | Fail | |
| Margins | Gross Margin > 35% | 62% | Pass |
| Net Margin > 15% | 4.5% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 14.7% | Pass |
| Current Ratio > 1.3 | 1.22 | Fail | |
| Opportunities | Return on Equity > 15% | 9.5% | Fail |
| Valuation | Normalized P/E < 20 | 9.37 | Pass |
| Dividends | Current Yield > 2% | 2.7% | Pass |
| 5-Year Dividend Growth > 10% | 3.9% | Fail | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only four points, Washington Post isn't making much news with its financials. But the stock is more than its name suggests, and along with its diverse set of businesses also has some potential for future growth.
Washington Post is obviously best known for its newspaper business. Newspapers have been in decline lately, with New York Times
But Washington Post has more than just its namesake paper. One of the most promising parts of the company is its Kaplan division, which has tapped into the for-profit education realm and makes up about 60% of the company's total revenue. That too has stoked controversy as fears of higher regulation have eaten into expectations, but when the Department of Education released less harsh regulations than expected in June, WaPo jumped along with fellow educators Apollo Group
That said, last week's earnings painted a scary picture. Second-quarter profit at the company fell by half from a year ago, with a 30% drop in enrollment from the Kaplan division.
Washington Post has a lot more work to do before it can call itself a perfect stock. Only by successfully making the transition away from depending on its print newspaper legacy will the company truly have a chance at clawing its way toward perfection again.
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.
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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.
