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 Madison Square Garden
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 Madison Square Garden.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 7.3% | Fail |
| 1-Year Revenue Growth > 12% | 6.2% | Fail | |
| Margins | Gross Margin > 35% | 41.3% | Pass |
| Net Margin > 15% | 4.9% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0.4% | Pass |
| Current Ratio > 1.3 | 1.24 | Fail | |
| Opportunities | Return on Equity > 15% | 6.9% | Fail |
| Valuation | Normalized P/E < 20 | 32.33 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 2 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only two points, Madison Square Garden looks like the Knicks on a really bad night. The owner of New York's premier arena has some great prospects, but it's also facing a bear of a crisis right now.
In early 2010, Cablevision
Earlier this year, things looked great for MSG. The Knicks and Rangers were planning to raise ticket prices, and some new trades for star basketball players had reignited excitement about the team. Even though its growth rates lagged concert promoter Live Nation
Now, though, the NBA lockout poses a dire threat. The venue could lose $1 million per night if games end up being cancelled by a work stoppage.
All in all, MSG's woes won't last forever. Once the NBA threat passes and a new deal is reached, basketball revenue should put MSG back on its growth trajectory. It has a long way to go to reach perfection, but MSG could see some real upside in the years to come.
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 Madison Square Garden 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."
