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 Sony (NYSE: SNE ) 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 Sony.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(4.8%)||Fail|
|1-Year Revenue Growth > 12%||(9.6%)||Fail|
|Margins||Gross Margin > 35%||32.4%||Fail|
|Net Margin > 15%||(7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||46.7%||Pass|
|Current Ratio > 1.3||0.83||Fail|
|Opportunities||Return on Equity > 15%||(14.6%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||2.2%||Pass|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 9|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Sony last year, the company has kept its score unchanged. A huge drop in the company's share price helped kick up Sony's dividend yield, but big losses continue to be a long-term concern.
Sony has seen a lot of its consumer-products strength disappear in recent years. Sales of televisions have been extremely weak across the industry as a combination of sluggish macroeconomic factors and saturated markets eat into sales. On the video game front, Sony has struggled as Nintendo and Microsoft (Nasdaq: MSFT ) have taken a chunk out of PlayStation sales. All that has added up to four straight years of losses for the company and pushed shares to a three-decade low.
Lately, competition in video gaming has come from far further down the price spectrum. Zynga (Nasdaq: ZNGA ) and a host of other cheap-app builders are trying to eat into the video game industry's revenue a dollar at a time, and while Zynga isn't thriving, its model does spell a challenge for Sony and its pricey console and games.
Later this year, Sony plans to release its new Orbis game system. But if rumors that the console won't play secondhand games and won't be backward-compatible turn out to be true, then the company won't just take away possible distribution channels through GameStop (NYSE: GME ) and Coinstar (Nasdaq: CSTR ) but will also irritate potential buyers who count on being able to resell old games to recoup part of their outlay.
Just as blockbusters Avengers and Hunger Games have helped their respective franchises, Sony has to hope that Men in Black 3 and new James Bond and Spiderman movies get its studio into the box-office record books. Sony needs all the help it can get from valuable content to try to make up for its lagging product sales, but until the company finds a direction for its consumer division, it's not going to get anywhere near perfection.
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.
Sony isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Sony to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.