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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 International Game Technology (NYSE: IGT ) 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 International Game Technology.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(4.2%)||Fail|
|1-Year Revenue Growth > 12%||7.4%||Fail|
|Margins||Gross Margin > 35%||57.2%||Pass|
|Net Margin > 15%||12.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||109.6%||Fail|
|Current Ratio > 1.3||2.16||Pass|
|Opportunities||Return on Equity > 15%||18.3%||Pass|
|Valuation||Normalized P/E < 20||15.16||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||(14.2%)||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at International Game Technology last year, the company has kept its four-point score. The slot machine maker's stock has fallen over the past year and now trades near its lowest levels since just after the market meltdown in 2009, but revenue appears to have hit bottom in a still-dicey environment for domestic gaming.
IGT makes slot machines that casinos use around the world. As mechanically based slot machines have given way to electronic versions, competition has gotten fiercer, with Bally Technologies (NYSE: BYI ) and WMS Industries (NYSE: WMS ) both vying with IGT to get the best licensing deals to make slot versions of popular themes.
Moreover, gaming is going through the same technology-led revolution as many industries. IGT is at the forefront of that move, with a cloud-computing management system that lets casinos track and boost their game performance as well as a mobile gaming system that Las Vegas Sands (NYSE: LVS ) has rolled out at its Venetian property in Las Vegas.
But with the U.S. gaming market having struggled lately, IGT has depended on international growth to hold up its business. Latin America has been a source of strength for IGT, but the company still depends on the U.S. market for the vast bulk of its sales.
For IGT to improve, therefore, it needs to see a U.S. gaming recovery. Yet as Las Vegas Sands and Wynn Resorts (Nasdaq: WYNN ) focus most of their efforts on Asia, it's hard to see when Vegas and the rest of the U.S. market will return to their former glory.
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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