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 Giant Interactive (NYSE: GA ) 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 Giant Interactive.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.4%||Fail|
|1-Year Revenue Growth > 12%||34.2%||Pass|
|Margins||Gross Margin > 35%||87.4%||Pass|
|Net Margin > 15%||51.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.19||Pass|
|Opportunities||Return on Equity > 15%||20.5%||Pass|
|Valuation||Normalized P/E < 20||8.74||Pass|
|Dividends||Current Yield > 2%||4.2%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||8 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Giant just started paying a dividend in March 2009. Total score = number of passes.
With eight points, Giant scores like a top gamer. A look at the stock's chart might leave you wondering why anyone likes the company, but a recent big payout explains the stock's drop.
Giant is an online gaming company in the lucrative Chinese market. Lately, Chinese gamers have been firing on all cylinders, with NetEase.com (Nasdaq: NTES ) , Changyou.com (Nasdaq: CYOU ) , and Shanda Games (Nasdaq: GAME ) all joining Giant in beating earnings estimates for the second quarter. Perfect World (Nasdaq: PWRD ) put in a huge beat, surpassing estimates by nearly 80%.
If you're wondering why shares dropped sharply in September, the answer has to do with its recent special dividend payment. Giant paid shareholders $3 per share, which caused the shares to drop a similar amount.
Despite the allegations of fraud aimed at so many Chinese companies, Giant doesn't appear to suffer from any such woes. At an amazingly low valuation, the online game company has plenty of potential. Giant isn't a perfect stock now, but it's getting close -- and could get even closer with just a tiny amount of help from the global economy.
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 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."