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 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. 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 Daktronics.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.5%||Fail|
|1-Year Revenue Growth > 12%||10.8%||Fail|
|Margins||Gross Margin > 35%||23.2%||Fail|
|Net Margin > 15%||1.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.8%||Pass|
|Current Ratio > 1.3||2.10||Pass|
|Opportunities||Return on Equity > 15%||4.3%||Fail|
|Valuation||Normalized P/E < 20||37.36||Fail|
|Dividends||Current Yield > 2%||3.6%*||Pass|
|5-Year Dividend Growth > 10%||26.3%*||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Excluding special dividend.
Since we looked at Daktronics last year, the company's score has stayed the same. A big boost in its dividend offset slowing revenue growth over the past year, but a drop of around 40% in the share price has investors concerned about the company's future.
Daktronics has had to deal with a tough environment for a long time. The company is best known for its digital scoreboards at sports arenas, but you're far more likely to see Daktronic products when you're driving on a major thoroughfare and pass by one of its digital billboards.
Late last year, the advertising industry seemed to be rebounding, and that's helped Daktronics. Although Lamar Advertising
Unfortunately, Daktronics' most recent earnings report threw a wrench in its recovery. The stock dropped 10% after the company announced an unexpected loss and gave pessimistic guidance for the current quarter as well. Both Daktronics and competitor LSI Industries have missed analyst estimates in their past four quarters, showing just how difficult the industry still is.
One possibility for growth could come in China. There, Focus Media
For Daktronics to improve, it needs to beat its competitors while seeing a true turnaround in advertising. Without that, it could be a long time before Daktronics starts to get closer to 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.
Daktronics 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 Daktronics to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.