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 IMAX
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 IMAX.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 13.6% | Fail |
| 1-Year Revenue Growth > 12% | 1.9% | Fail | |
| Margins | Gross Margin > 35% | 49.8% | Pass |
| Net Margin > 15% | 26.7% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 21.8% | Pass |
| Current Ratio > 1.3 | 1.51 | Pass | |
| Opportunities | Return on Equity > 15% | 45% | Pass |
| Valuation | Normalized P/E < 20 | 128.53 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at IMAX last year, the movie theater specialist has dropped a point. Slowing revenue growth reflects a struggling global economy and bad overall box-office performance for the movie industry, but the company continues to expand its geographic reach across the globe.
The key to understanding IMAX's success is that it's uniquely tied to true blockbuster movie hits. For instance, Time Warner
But IMAX continues its global strategy of getting itself into every market it can penetrate. With new deals for more screens in China and Indonesia in just the past month, the company is banking on premium cinema outlasting conventional rivals in emerging markets.
The real test for IMAX will be whether 3-D takes hold. RealD
For IMAX, movie popularity will come and go. But the company's growth policy should help it take root and set the stage for even more sales down the road. That won't necessarily pan out in the short run, but longer-term investors should eventually get a payoff from IMAX.
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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