Has World Wrestling Entertainment 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 World Wrestling Entertainment (NYSE: WWE  ) 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 World Wrestling Entertainment.

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% 4.5% Fail
Margins Gross Margin > 35% 38.7% Pass
  Net Margin > 15% 8.4% Fail
Balance Sheet Debt to Equity < 50% 0.6% Pass
  Current Ratio > 1.3 4.43 Pass
Opportunities Return on Equity > 15% 13.0% Fail
Valuation Normalized P/E < 20 18.34 Pass
Dividends Current Yield > 2% 4.9% Pass
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at World Wrestling Entertainment last year, the professional wrestling exhibitor has lost two points. A big dividend cut is the primary reason for the drop, although falling returns on equity also contributed.

The slow economy over the past several years hasn't done World Wrestling Entertainment any favors. A general lack of disposable income among customers has kept revenue growth relatively slow compared to past economic boom times.

But the company has pulled out all the stops in order to try to keep its profitability up. Cost-cutting measures have helped keep net income up, and live events remain a primary profit center. Its 25th annual Survivor Series helped bail out Madison Square Garden (Nasdaq: MSG  ) during a tough time for the stadium company, as the NBA lockout eliminated 16 games from the normal regular season.

Moreover, the company has identified some secondary sources of revenue. Its sales of action figures and related toys improved when it ended a partnership with JAKKS Pacific (Nasdaq: JAKK  ) in favor of Mattel (Nasdaq: MAT  ) , and WWE also profits from a licensing deal with game-maker THQ (Nasdaq: THQI  ) .

For WWE to get back toward perfection, it needs to get past its big dividend cut and focus on the innovations that got it to where it is today. By tapping into a sports-hungry population that has latched onto mixed martial arts, WWE could return to its former glory.

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.

World Wrestling Entertainment may not be the perfect stock, but we've got some alternatives you may like better. Learn about three more promising stocks for the long haul in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add World Wrestling Entertainment to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Madison Square Garden. Motley Fool newsletter services have recommended buying shares of Mattel. 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2012, at 10:57 AM, valueinvesting12 wrote:

    A conservatively-run company, the WWE has over $150 million in excess cash and investment securities on its balance sheet, which are not needed or used to run the business. Once you back out that excess cash and securities, the return on equity is well over 20%. So it should get a 6 out of 10.

    It's also important to note that the WWE is virtually debt-free.

  • Report this Comment On February 15, 2012, at 11:02 AM, valueinvesting12 wrote:

    For some reason my comment didn't go through before, but I just wanted to point out that the WWE has ~$150 million in excess cash and securities on its balance sheet that aren't used or needed to run its business. Once you back out that excess cash, ROE is well over 20%. Therefore WWE should have a 6 out of 10 in your scoring system.

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