Has New York Times 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 New York Times (NYSE: NYT  ) 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 New York Times.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (6.7%) Fail
  1-Year Revenue Growth > 12% 0.7% Fail
Margins Gross Margin > 35% 58.8% Pass
  Net Margin > 15% (0.1%) Fail
Balance Sheet Debt to Equity < 50% 139.3% Fail
  Current Ratio > 1.3 1.89 Pass
Opportunities Return on Equity > 15% (4.7%) Fail
Valuation Normalized P/E < 20 8.89 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 New York Times last year, the company's score has dropped a point. Plunging returns on equity were responsible for the fall and helped contribute to about a 20% drop in the company's shares over the past year.

New York Times certainly isn't the only company in the newspaper business that has struggled to compete in an online world. News Corp. (Nasdaq: NWS  ) and Gannett (NYSE: GCI  ) have resorted to paywalls on many of their publications in order to try to raise revenue, and even though Washington Post (NYSE: WPO  ) hasn't followed suit, longtime investor Warren Buffett has said that its free online content model isn't sustainable. Locally oriented McClatchy (NYSE: MNI  ) has faced even stronger headwinds, as its substantial debt looks increasingly ominous in an environment of falling ad revenue.

But New York Times has made some moves to try to improve its business. By selling off a group of smaller regional newspapers last year, the company helped refocus on its namesake newspaper, The New York Times, whose national scope leads to broader appeal from advertisers. At the same time, its paywall has finally started to bring some success, as the company now has more than 500,000 digital subscribers. As the company lowers its monthly allowance of free content, New York Times could see an even greater pickup in subscription growth.

For New York Times to turn things around, it needs to use its reputation to build an online presence that millions of people are willing to pay for. That may be difficult to do, but it's getting clearer that doing something other than maintaining the status quo is essential if New York Times wants 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.

New York Times isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays 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 New York Times 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 in this article. 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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