By Dan Caplinger, The Motley Fool
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 P.F. Chang's (Nasdaq: PFCB ) 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 P.F. Chang's.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
2 out of 9
Source: Capital IQ, a division of Standard and Poor's.
P.F. Chang's can only manage to cook up a score of 2. Although the restaurant business overall is a tough one in today's environment, P.F. Chang's has some specific problems it's facing.
Asian cooking is a hot area for restaurants right now. Chipotle (NYSE: CMG ) recently announced plans to open an offshoot chain called ShopHouse Southeast Asian Kitchen on the East Coast this summer.
But times have been tough for casual dining chains across the board. Looking at Cheesecake Factory (Nasdaq: CAKE ) , Red Robin Gourmet Burgers (Nasdaq: RRGB ) , and Darden Restaurants (NYSE: DRI ) , you'll see the same story: slow revenue growth at best combined with narrow net margins.
Just yesterday, shares of the P.F. Chang's fell 10% after it released a poor earnings report that fell below expectations. In particular, the company lost more than $1 million in sales from eight Arizona restaurants that were raided by immigration officials.
With higher food costs, restaurant companies have had to choose between raising prices and potentially losing customers or holding the line and dealing with damage to already skinny margins. Until the situation changes, P.F. Chang's isn't going to look like the perfect stock.
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.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Chipotle is a Motley Fool Rule Breakers and Motley Fool Hidden Gems choice. Motley Fool Options has recommended writing a covered strangle on Red Robin Gourmet Burgers. The Fool owns shares of Chipotle and Red Robin Gourmet Burgers. 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 Motley Fool has a disclosure policy.
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