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 JAKKS Pacific (Nasdaq: JAKK ) 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 JAKKS Pacific.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.2%||Fail|
|1-Year Revenue Growth > 12%||(1.8%)||Fail|
|Margins||Gross Margin > 35%||32.7%||Fail|
|Net Margin > 15%||5.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||22.0%||Pass|
|Current Ratio > 1.3||3.07||Pass|
|Opportunities||Return on Equity > 15%||9.1%||Fail|
|Valuation||Normalized P/E < 20||15.66||Pass|
|Dividends||Current Yield > 2%||2.9%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful; JAKKS started paying a dividend in Sept. 2011. Total score = number of passes.
With four points, JAKKS Pacific doesn't seem like it's winning the investing game just yet. The toymaker has some things going for it, but in a highly competitive industry, it needs to keep working harder to thrive.
JAKKS is the company behind a wide variety of licensed toys, games, and costumes, with rights to popular franchises including Pokemon, Disney Princess, Iron Man, and Sesame Street, just to name a few. With relationships with many companies, including Disney (NYSE: DIS ) , Time Warner's (NYSE: TWX ) Warner Bros., and Hasbro (Nasdaq: HAS ) , JAKKS manages to walk the line toward making all of its licensing partners happy rather than having to go to exclusive partnerships that would limit its offerings.
But for the most part, the entire toy industry has struggled lately. In their most recent quarters, Hasbro, Mattel (Nasdaq: MAT ) , and JAKKS all struggled, with Mattel merely meeting earnings estimates and Hasbro falling short on both sales and profits. The answer could be that kids want higher-tech toys, as LeapFrog (NYSE: LF ) has had its stock double since August on the coattails of its LeapPad learning tablet.
Earlier this week, JAKKS management delivered a coup de grace, saying that "the sales performance of its products has been disappointing" and knocking 2011 earnings guidance down by nearly $1 per share. The stock plunged in response.
For JAKKS to start moving in the right direction, it needs to find a successful strategy for sustaining and boosting profitability. As long as huge earnings disappointments keep coming, JAKKS isn't going to get very close to 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.
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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."