Has GameStop Corp. (GME) Become the Perfect Stock?

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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?

GameStop options active on earnings, sales of Call of Duty┬«: Black Ops IIOne 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 GameStop Corp. (NYSE:GME) 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 GameStop.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 6.4% Fail
1-year revenue growth > 12% (7.9%) Fail
Margins Gross margin > 35% 29.4% Fail
Net margin > 15% (4%) Fail
Balance sheet Debt to equity < 50% 0% Pass
Current ratio > 1.3 1.07 Fail
Opportunities Return on equity > 15% (14.1%) Fail
Valuation Normalized P/E < 20 8.72 Pass
Dividends Current yield > 2% 4% Pass
5-year dividend growth > 10% NM NM
Total score 3 out of 9

Source: S&P Capital IQ. NM = not meaningful; GameStop paid its first dividend in Feb. 2012. Total score = number of passes.

Since we looked at GameStop last year, the company has kept its three-point score for the third year in a row, with revenue growth slowing but the game retailer starting to pay a dividend. The stock has been volatile but has managed to climb by about 10% over the past year.

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