Is Take-Two Interactive 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 Take-Two Interactive (Nasdaq: TTWO  ) 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 Take-Two Interactive.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (1.6%) Fail
  1-Year Revenue Growth > 12% (17.4%) Fail
Margins Gross Margin > 35% 37.9% Pass
  Net Margin > 15% (3.9%) Fail
Balance Sheet Debt to Equity < 50% 19.7% Pass
  Current Ratio > 1.3 2.32 Pass
Opportunities Return on Equity > 15% (6.6%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

With only three points, Take-Two Interactive isn't making the top-score list. The video game industry has been a tough place for investors lately, but with a potential turnaround coming, Take-Two could see its shares bounce back.

Video games have evolved quite a bit in recent years. With the advent of web-based games from companies like Zynga (Nasdaq: ZNGA  ) and Glu Mobile (Nasdaq: GLUU  ) , traditional video game companies like Activision Blizzard (Nasdaq: ATVI  ) , Electronic Arts (Nasdaq: EA  ) , and Take-Two have struggled to get players to open their wallets wide enough to buy their games. Increasingly, video game makers have relied on hit franchises like Activision's Call of Duty and EA's Battlefield to produce strong sales.

For its part, Take-Two has its Grand Theft Auto V coming out at some point, but a November trailer that Take-Two put out for the game didn't reveal a release date. The previous version of the game, which came out in 2008, produced record-breaking performance at the time. Now, though, the company has diversified beyond the GTA franchise.

Going forward, it's unclear how Take-Two will best be able to navigate the trends toward cheaper social-based games. To reach toward perfection, though, it will have to reverse recent sales declines and claw itself back toward profitability.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Activision Blizzard and Take-Two and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Take-Two and Activision Blizzard, as well as creating a synthetic long position in Activision Blizzard. 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 Fool has a disclosure policy.


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  • Report this Comment On December 28, 2011, at 4:54 PM, GrandSlammer wrote:

    Sweden listed G5 Entertainment fits the "perfect stock" criteria quite well. The mobile gaming companig does not pay a dividend at the moment since they are trying all the growth potential of the fast growing smartphone and tablet markets. Great company, net cash, above 30% EBIT margin. More info on nordicinvestor.net

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