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 GameStop
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 GameStop.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 15.6% | Pass |
| 1-Year Revenue Growth > 12% | 3.9% | Fail | |
| Margins | Gross Margin > 35% | 27.3% | Fail |
| Net Margin > 15% | 4.2% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 4.2% | Pass |
| Current Ratio > 1.3 | 1.06 | Fail | |
| Opportunities | Return on Equity > 15% | 14.0% | Fail |
| Valuation | Normalized P/E < 20 | 9.24 | Pass |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at GameStop last year, the video game retailer hasn't seen its score move at all. The company still faces huge threats from competitors both among traditional retailers and from video game makers themselves.
For a long time, GameStop had the video game market cornered. With its then-unique model of buying back used games for store credit and then reselling them at a profit, GameStop filled an important niche among cash-strapped gamers.
But GameStop didn't have the moat to keep out competitors. Big-box retailer Best Buy
The bigger long-term threat, though, comes from game companies. Digital distribution has become a huge growth area for Electronic Arts
GameStop appears to be an old-school company in a rapidly evolving industry. It's unclear exactly what the company has to do, but whatever it is, GameStop will need to reinvent itself in order to survive.
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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