Has Giant Interactive 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 Giant Interactive (NYSE: GA  ) 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 Giant Interactive.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

14.4%

Fail

 

1-Year Revenue Growth > 12%

28.7%

Pass

Margins

Gross Margin > 35%

90.3%

Pass

 

Net Margin > 15%

60.7%

Pass

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

2.64

Pass

Opportunities

Return on Equity > 15%

27.8%

Pass

Valuation

Normalized P/E < 20

9.11

Pass

Dividends

Current Yield > 2%

5.9%

Pass

 

5-Year Dividend Growth > 10%

15.7%*

Pass

       
 

Total Score

 

9 out of 10

Source: S&P Capital IQ. Total score = number of passes. *Three-and-a-half-year growth rate.

Since we looked at Giant Interactive last year, the company gained a point. All it would take for the company to reach perfection is a bit stronger long-term revenue growth, and the stock is up 20%, a very strong performance compared to its peers.

Online gaming is extremely popular in China, where Giant does business alongside plenty of competitors. For much of the industry, China's economic slowdown has produced big disappointment. Both Shanda Games (Nasdaq: GAME  ) and Perfect World (Nasdaq: PWRD  ) posted lackluster results in their most recent quarters, with sales figures coming in particularly weak. Even NetEase.com (Nasdaq: NTES  ) , which has benefited for a long time from its status as Chinese distributor for Activision Blizzard's (Nasdaq: ATVI  ) World of Warcraft franchise, came up short in the second quarter.

But Giant has distinguished itself from many of its peers because of its cash-rich balance sheet, which gives it plenty of flexibility to pay out a big dividend without straining its finances. In addition, it's managed to keep revenue growth high.

Still, Giant will have to deal with increased competitive pressure. As U.S. gaming companies like Activision Blizzard and Take-Two Interactive try to take on the Asian market, Giant's growth prospects could weaken. With a gold rush of sorts happening in the region, Giant needs to act quickly to cement its leadership position.

For Giant to improve, all it needs is to get revenue growth just a bit higher. Despite macroeconomic woes, that's an entirely reachable goal for Giant in the coming year as it strives for perfection.

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 the best investments from the rest.

Chinese companies are doing a great job of making money from the growing Asian market, but profiting from our increasingly global economy can be as easy as investing in your own backyard. Our free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

Click here to add Giant Interactive to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard, NetEase.com, Perfect World, and Take-Two Interactive Software. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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