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 Callaway Golf (NYSE: ELY) 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 Callaway Golf.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (2.7%) Fail
  1-Year Revenue Growth > 12% (8.4%) Fail
Margins Gross Margin > 35% 37.6% Pass
  Net Margin > 15% (19.4%) Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 2.50 Pass
Opportunities Return on Equity > 15% (28.4%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.6% Fail
  5-Year Dividend Growth > 10% (32.2%) Fail
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Callaway Golf last year, the golf equipment maker has kept its three-point score. The company's losses have gotten a lot wider, though, suggesting even more trouble ahead.

Callaway has suffered through a long, tough environment for golf-related products that runs against the grain of general success in sporting goods. Declines in golf sales were part of what led the former Fortune Brands to sell off its golf division. Dick's Sporting Goods (NYSE: DKS) had to close some of its specialty golf stores in light of weak sales.

The hard thing for Callaway is that other niches are gaining in popularity. lululemon athletica (Nasdaq: LULU) has ridden the yoga craze to huge profits on high-margin products. Even generalist Nike (NYSE: NKE) has done a good job of navigating sports trends, maintaining its brand image even as its endorsement deal with Tiger Woods -- which many credit for launching its golf line -- seemed to flounder.

Still, Callaway isn't giving up. With its new RAZR XF club set and a new footwear line that features temperature management and other technological advances, Callaway is trying to get itself back on track. Yet facing hungry competitor Under Armour (NYSE: UA), which has its own line of golf clothing and accessories aimed at extending its overall reach in athletic apparel, Callaway isn't going to have easy going anytime soon.

Callaway seems to be in a slowly dying business. To turn things around, the company needs excitement in the golf world again, in order to boost visibility and the willingness of consumers to spend. Without that, Callaway won't get much closer to perfection anytime soon.

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.

Callaway Golf doesn't look like a stock you can count on for the long haul. For better choices, take a look at the Fool's latest special report. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

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