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 and then decide whether Melco Crown (NASDAQ:MPEL) 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.
  • Moneymaking 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 Melco Crown.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

113.6%

Pass

 

1-Year Revenue Growth > 12%

23.3%

Pass

Margins

Gross Margin > 35%

78%

Pass

 

Net Margin > 15%

10.6%

Fail

Balance Sheet

Debt to Equity < 50%

68.5%

Fail

 

Current Ratio > 1.3

1.60

Pass

Opportunities

Return on Equity > 15%

13.6%

Fail

Valuation

Normalized P/E < 20

27.61

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 10

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

Since we looked at Melco Crown last year, the company has hung onto the extra point it gained from 2010 to 2011 but hasn't improved further. Revenue growth in particular has slowed tremendously, although the stock still managed to pick up about 25% over the past year.

Melco Crown concentrates entirely on what has become the epicenter of the gaming world over the past several years: Macau. Although Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN), and MGM Resorts (NYSE:MGM) have all come in to try to grab a piece of the Macau pie, Melco Crown's City of Dreams and Altira Macau have pulled in more than $4 billion over the past 12 months.

Unfortunately, Macau's fortunes have slowed down somewhat lately. Much of the blame rests on VIP junket players, who simply aren't spending as much as they did before the Asian slowdown started. Wynn and Las Vegas Sands have seen it more in their casinos than Melco Crown, but Melco hasn't been entirely immune from the phenomenon.

Where Melco stands out from the crowd is in valuation. Perhaps because of its geographic concentration, Melco fetches smaller multiples to operating income than most of its peers. Even Caesars Entertainment (NASDAQ:CZR), which doesn't have an Asian presence, fetches a higher valuation.

For Melco to improve, projects like its partially owned resort in the Philippines will need to add some growth to the company's overall bottom line. If Asia can engineer a soft landing for its economic slowdown, then Melco has plenty of room to rise once the next expansion begins.

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.

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Fool contributor Dan Caplinger and The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.