Is Biglari Holdings 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?

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 Biglari Holdings (NYS: BH) 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 Biglari Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-year annual revenue growth > 15%2.2%Fail
 1-year revenue growth > 12%5.1%Fail
MarginsGross margin > 35%24%Fail
 Net margin > 15%4.6%Fail
Balance sheetDebt to equity < 50%50.9%Fail
 Current ratio > 1.31.39Pass
OpportunitiesReturn on equity > 15%11.2%Fail
ValuationNormalized P/E < 2017.22Pass
DividendsCurrent yield > 2%0%Fail
 5-year dividend growth > 10%0%Fail
    
 Total Score 2 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With only two points, Biglari Holdings has a lot of work to do to reach perfection. The company is well-known for its activist investor CEO, but both the stock and its financials have seen better times.

Biglari has a history of shaking up the restaurant industry. After winning a fight to take control of Steak n Shake and then merging with the Western Sizzlin chain, Biglari then pushed Friendly's into a private-equity takeover. Yet past forays into Red Robin Gourmet Burgers (NAS: RRGB) and Sonic (NAS: SONC) largely came to naught, as Biglari sold the shares after holding them for only a few months.

Biglari hasn't stuck solely to restaurants, though. Earlier this year, he took positions in insurer Penn Millers Holding and consumer brand company CCA Industries. Motley Fool Special Ops advisor Tom Jacobs thinks Biglari wants to benefit from insurance company float a la Berkshire Hathaway (NYS: BRK.B) , while CCA is more of a dividend play.

Recently, though, Biglari got back to basics with an all-out assault on Cracker Barrel (NAS: CBRL) . Biglari believes that Cracker Barrel is underachieving by failing to separate its restaurant results from its gift shop sales, potentially masking problems at the chain.

Biglari makes plenty of headlines, but the stock has been far from perfect for investors lately. If Biglari can regain its winning ways either through Cracker Barrel or another opportunity, though, the sky's the limit for the beaten-down shares.

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.

Click hereto add Biglari Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

At the time this article was published Fool contributorDan Caplingerowns shares of Berkshire Hathaway. The Motley Fool owns shares of Biglari Holdings, Red Robin Gourmet Burgers, and Berkshire Hathaway.Motley Fool newsletter serviceshave recommended buying shares of Berkshire Hathaway. 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 adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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