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 and then decide whether Daktronics
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. Although 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 a 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.
- Moneymaking 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 Daktronics.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 7.4% | Fail |
| 1-Year Revenue Growth > 12% | 12.3% | Pass | |
| Margins | Gross Margin > 35% | 25.2% | Fail |
| Net Margin > 15% | 3.2% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 1.3% | Pass |
| Current Ratio > 1.3 | 2.17 | Pass | |
| Opportunities | Return on Equity > 15% | 6.9% | Fail |
| Valuation | Normalized P/E < 20 | 35.87 | Fail |
| Dividends | Current Yield > 2% | 0.9% | Fail |
| 5-Year Dividend Growth > 10% | 58.5% | Pass | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Daktronics can't achieve perfection with just 4 points. But its Jumbotrons could help you keep score as it tries to improve toward a perfect 10.
Daktronics makes electronic displays, including scoreboards, timing systems, video displays, and digital billboards. Five years ago, the company was on top of the world, as it dominated the large-format display space and parlayed that domination into a 25-bagger for its stock. But as fellow Fool Anders Bylund predicted, the stock came crashing back to earth during the market meltdown.
Last year, though, the company started its comeback. An earnings recovery and rising backlogs of unfilled orders showed Daktronics' potential to new investors, and without meaningful competition from potential rivals such as Panasonic
Since then, shareholders have gone on a roller-coaster ride. Earlier this year, shares took a dive when the company reined in enthusiasm about the future. Yet just yesterday, the company reversed a year-ago loss and beat expectations, sending shares up 9%.
As top dog in a niche industry, Daktronics is subject to the whims of its customers. Just as companies such as DirecTV
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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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.
