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 Mattel (Nasdaq: MAT ) 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 Mattel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.5%||Fail|
|1-Year Revenue Growth > 12%||5.3%||Fail|
|Margins||Gross Margin > 35%||50.4%||Pass|
|Net Margin > 15%||12.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||58.7%||Fail|
|Current Ratio > 1.3||2.21||Pass|
|Opportunities||Return on Equity > 15%||29.5%||Pass|
|Valuation||Normalized P/E < 20||17.38||Pass|
|Dividends||Current Yield > 2%||4%||Pass|
|5-Year Dividend Growth > 10%||9%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Mattel last year, the company's score has fallen by two points. Drops in dividend growth and a rise in its debt-to-equity ratio caused the drop, but shareholders have to be happy about the toymaker's overall performance over the past year.
Mattel is an obvious choice for investors looking to buy shares of companies whose products they know. With its toys dominating children's collections, Mattel is the name behind Barbie, Fisher-Price, and Hot Wheels, among other popular brands.
Lately, though, toymakers have had a tough time. Last month, Mattel saw its shares plunge 9% after its quarterly profit came in below analysts' estimates, as strength in its newer Monster High and American Girl collections wasn't enough to offset falling sales of Barbie worldwide. Similarly, Jakks Pacific (Nasdaq: JAKK ) reported a wider loss than in the previous year, and but for Oaktree Capital's bid for the company, its shares would likely have fallen sharply as well. Even Hasbro (Nasdaq: HAS ) had a disappointing holiday quarter despite having some impressive franchises under its belt.
One big area of competition that Mattel faces comes from the technology front. LeapFrog Enterprises (NYSE: LF ) had a hit with its LeapPad tablet. Piggybacking on the success of mobile tablets for adults, LeapFrog's $100 offering has been immensely successful, with the company's sales jumping 11% during the holiday quarter.
But for Mattel to improve, the most obvious area for better results will come from licensing. Hasbro has the licensing to Disney's (NYSE: DIS ) blockbuster Avengers, but there's no reason why Mattel shouldn't get its share of future revenue from popular movie franchises. If it can identify and cash in on those opportunities, they could help Mattel look more like a perfect stock in the years to come.
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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