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 World Wrestling Entertainment, Inc. (NYSE:WWE) 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 World Wrestling Entertainment.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-year annual revenue growth > 15%||1.1%||Fail|
|1-year revenue growth > 12%||(2.4%)||Fail|
|Margins||Gross margin > 35%||39.6%||Pass|
|Net margin > 15%||4.6%||Fail|
|Balance sheet||Debt to equity < 50%||0%||Pass|
|Current ratio > 1.3||3.56||Pass|
|Opportunities||Return on equity > 15%||7.2%||Fail|
|Valuation||Normalized P/E < 20||25.82||Fail|
|Dividends||Current yield > 2%||5.6%||Pass|
|5-year dividend growth > 10%||(14.3%)||Fail|
|Total score||4 out of 10|
Since we looked at World Wrestling Entertainment last year, the company has lost another point after dropping 2 points from 2011 to 2012. The stock has also continued to struggle, falling by about 5% over the past year.
World Wrestling Entertainment hasn’t given investors the show they’ve hoped to see for quite a while. The company hasn’t been completely without success, as its annual WrestleMania event grossed a record $8.9 million last year. Yet growth has eluded the company, and its recent revenue contraction reflects how its attempts to jump-start its business haven’t produced results.
The company hasn’t given up on its growth efforts. It started the television series WWE Main Event last summer on the ION network, complementing its deals with Comcast Corporation (NASDAQ:CMCSA) to broadcast Raw and Smackdown. It also launched a show on the CW network oriented toward kids, Saturday Morning Slam, in an agreement with CBS Corporation (NYSE:CBS) and Time Warner Inc. (NYSE:TWX). With Comcast, CBS, and Time Warner all fighting to find valuable content to show on their growing stable of networks, their willingness to make deals with WWE is a sign of their confidence in the entertainment company.
Perhaps the most interesting initiative World Wrestling Entertainment has in the pipeline is its proposed WWE Network. The dedicated cable network would show 24-hour programming from the company’s huge library of content, which includes shows from as far back as the 1990s.
For WWE to improve, it needs to show that it can fend off growing competition from the Ultimate Fighting Championship series, which has grown immensely in popularity. Otherwise, WWE may never get any 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 out the best investments from the rest.
The article Has World Wrestling Entertainment Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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