Has Lions Gate Entertainment Become the Perfect Stock?

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 Lions Gate Entertainment (LGF-A -1.64%) 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.
• 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 Lions Gate Entertainment.

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

Since we looked at Lions Gate Entertainment last year, the company has lost a point as its bottom line went negative. The stock, though, has been a huge winner, more than doubling over the past year.

For movie companies, the mark of success is a big blockbuster hit. For Disney (DIS -1.15%) and Time Warner's Warner Bros., blockbusters are regular events. But after getting a taste of the limelight with its movies based on the teen-vampire Twilight books, the success of the first Hunger Games movie early in 2012 vaulted Lions Gate into the stratosphere, and with three more movies expected in the series, it will make up a huge part of the studio's revenue for years to come.

Interestingly, though, Lions Gate wasn't able to turn its box office winners into bottom-line profits. But a lot of the costs that hurt Lions Gate's net income are expenses related to future releases. In particular, with the second Hunger Games movie as well as a movie based on the Orson Scott Card book Ender's Game coming in late 2013, it's almost a certainty that the studio will recoup its outlays.

Lions Gate aims to cash in with a wide array of revenue generators. From distribution methods that include both IMAX (IMAX -3.34%) and conventional theaters to DVD releases, cable TV viewings, and streaming access, the studio expects to earn a lot more from all of its movie successes in the future.

Another interesting part of Lions Gate's business is its participation in the Epix premium cable channel joint venture. With the venture's exclusive streaming license with Netflix (NFLX 1.70%) having expired last month, Epix has added Amazon.com (AMZN -2.00%) to its list of partners, which should boost profits.

For Lions Gate to improve, it needs the investments that are hurting its bottom line today to pay off as well as most expect. A healthier balance sheet that could result from more success would inevitably push Lions Gate a bit closer to perfection as well.

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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