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.
What We Want to See
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.
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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