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 News Corp. (ASX: NWS) 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 normalised figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a cheque 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 News Corp.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.1%||Fail|
|1-Year Revenue Growth > 12%||5.4%||Fail|
|Margins||Gross Margin > 35%||38.4%||Pass|
|Net Margin > 15%||10.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||53.2%||Fail|
|Current Ratio > 1.3||2.08||Pass|
|Opportunities||Return on Equity > 15%||13.4%||Fail|
|Valuation||Normalised P/E < 20||17.11||Pass|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||11.2%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at News Corp. last year, the company has picked up a point. Some relatively impressive dividend hikes helped the media giant’s score, but News Corp. has some even more ambitious plans for the future.
News Corp.’s diverse mix of businesses have faced much different environments recently. With its Fox television and cable networks, News Corp. has enjoyed the same success as Disney‘s (NYSE: DIS) ABC and ESPN networks and Comcast and General Electric‘s (NYSE: GE) NBC Universal. With valuable content fetching more of a premium than ever, Fox is a juggernaut of profitability for the company.
By contrast, the publishing industry has struggled for a long time. Admittedly, the company’s Wall Street Journal was much quicker to monetise its online distribution than many of its competitors. Gannett only recently joined New York Times and others in instituting pay walls for some of its content. Australia’s Fairfax Media (ASX: FXJ) has also arrived late to the paywall party.
In order to get the full benefit of the more lucrative entertainment division, News Corp. announced just last month that it plans to split up the company into two pieces. The move will also help reduce the impact of the publishing division’s phone-hacking scandal.
What’s likely to come after the split is a publisher that may never prove to be a perfect stock and an entertainment company that will have a lot more potential to shine, going up against Disney, Time Warner (NYSE: TWX), and other production companies in the movie business as well as its TV rivals. Interested investors should stay tuned to see whether and how an eventual split actually takes shape.
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.
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A version of this article, written by Dan Caplinger, originally appeared on fool.com