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 International Game Technology
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 International Game Technology.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (4.5%) | Fail |
| 1-Year Revenue Growth > 12% | (4.3%) | Fail | |
| Margins | Gross Margin > 35% | 57.7% | Pass |
| Net Margin > 15% | 13.1% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 111.9% | Fail |
| Current Ratio > 1.3 | 2.44 | Pass | |
| Opportunities | Return on Equity > 15% | 21.1% | Pass |
| Valuation | Normalized P/E < 20 | 19.10 | Pass |
| Dividends | Current Yield > 2% | 1.5% | Fail |
| 5-Year Dividend Growth > 10% | (13.5%) | Fail | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
International Game Technology's score of 4 isn't going to win any games. After getting hit hard by a struggling casino industry, the game maker has had to pull itself back up by its bootstraps.
When it comes to slot machines, IGT is on the cutting edge. The company is largely behind the revolution in electronic slots, including the networked progressive jackpot systems that create the potential for million-dollar payouts.
As you'd expect, IGT's core business makes it vulnerable to fluctuations in the fortunes of casino operators. During the financial crisis, Las Vegas Sands
What saved casinos, though, was Macau; as a major supplier, IGT has had to follow suit. Like card machine maker Shuffle Master
Granted, IGT is far from a sure bet. Games go in and out of style quickly, and the company has to defend its territory diligently. But the company has led its industry for a long time, and having survived one of the toughest periods in its history, it could be time for IGT investors to hit the jackpot.
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.
