Has JAKKS Pacific 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 JAKKS Pacific (JAKK -0.18%) 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 JAKKS Pacific.

Source: S&P Capital IQ. NM = not meaningful; JAKKS Pacific had negative earnings and initiated its dividend in Sept. 2011. Total score = number of passes.

Since we looked at JAKKS Pacific last year, the company has dropped a point, as it went from a profit to a loss for the year. The stock hasn't performed well either, falling about 10% over the past year.

JAKKS produces a fairly wide variety of games and toys. But in an industry where giants Mattel (MAT 3.16%) and Hasbro (HAS 1.14%) dominate the playing field with such well-known brands as Barbie and Nerf, JAKKS falls a distant third, without much of a name-brand presence in the space.

One niche where JAKKS has traditionally done well is in handheld games. But even there, LeapFrog Entertainment (LF.DL) has vaulted onto the scene with its LeapPad tablet, which took the toy world by storm and caused a huge boost for LeapFrog's business. To compete, JAKKS needs to come up with a cutting-edge handheld product that can generate the same mass appeal.

A big distraction for JAKKS has come from a private equity fight over the company. Oaktree Capital initially offered $20 per share last year to buy out the company, but then Clinton Group agreed to stand still on acquisition activity contingent on JAKKS buying as much as 4 million shares at $20 per share. JAKKS did a tender offer for the shares back in May, but the shares quickly dropped back when the Oaktree deal didn't go anywhere.

The big potential for JAKKS comes from marketing deals. With bigger players snapping up licensed toys from Disney (DIS -0.55%) and other big-name entertainment companies, the big opportunity for JAKKS is to make more big-impact licensing deals. Without that growth potential, JAKKS may never get much closer to 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 out the best investments from the rest.

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