Has TiVo Become the Perfect Stock?

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 TiVo (Nasdaq: TIVO  ) 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 TiVo.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (1.1%) Fail
  1-Year Revenue Growth > 12% (10.5%) Fail
Margins Gross Margin > 35% 44.3% Pass
  Net Margin > 15% 30.2% Pass
Balance Sheet Debt to Equity < 50% 55.4% Fail
  Current Ratio > 1.3 5.28 Pass
Opportunities Return on Equity > 15% 24.8% Pass
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.

Since we looked at TiVo last year, the company has actually picked up a point. Improving returns on equity explain the bump, although those reflect a one-time settlement whose effect could well be short-lived.

TiVo is the pioneering company behind digital video recording. Back in the day, the company made plenty of money from selling equipment and subscriptions in bundles, but in recent years, it has lost subscribers and had trouble earning profits.

Where TiVo has been successful, though, is in defending its DVR technology against rivals like cable and satellite TV and telecom companies. Earlier this year, the company settled a long-standing dispute with Dish Network (Nasdaq: DISH  ) , and it more recently won an early ruling in its case against AT&T (NYSE: T  ) , which some say could set the stage for another healthy settlement. The company also has actions against Verizon (NYSE: VZ  ) .

In part because of that vigilance, TiVo has seen some companies willing to work with it rather than trying to circumvent its DVR intellectual property. It now has a partnership with DirecTV (Nasdaq: DTV  ) making satellite TV boxes for the company.

The problem, though, is that licensing revenue and legal settlements haven't made TiVo's technology any more relevant. In September, the company launched its Premiere Elite DVR, yet with Netflix (Nasdaq: NFLX  ) and its peers offering streaming on demand, the ability to save four shows at once is rapidly becoming unnecessary.

TiVo may never make the move toward perfection. In order to regain some of its past glory, TiVo needs new innovation to adapt itself to the new video-streaming reality. Without it, TiVo will be stuck in its current mediocrity.

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.

Click here to add TiVo 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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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