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 Avis Budget (NAS: CAR) 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 Avis Budget.
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 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only two points, Avis Budget doesn't look like it's trying harder. The rental car company lost face against its biggest rival earlier this year, and threats of a double-dip recession aren't helping its prospects any.
During the financial crisis, the rental car industry got hammered as credit dried up. One look at balance sheets in the industry will tell you how important leverage is for this business, and Avis Budget has debt-to-equity ratios well above both Hertz (NYS: HTZ) and Dollar Thrifty (NYS: DTG) . But the turnaround in the economy and the availability of credit helped the ailing industry.
That led to attempts at consolidation. Hertz made a bid to buy Dollar Thrifty, only to see Avis make a sweeter offer. Most recently, though, Avis decided to drop out of the bidding, potentially ceding Dollar Thrifty to Hertz and thereby accepting its also-ran status among rental companies. Dollar Thrifty has asked both parties for final bids, but both have to get regulatory approval for a transaction that could conceivably threaten competition in the industry.
Now, though, Avis and its peers face competition from new sources. priceline.com (NAS: PCLN) recently bought an international car rental company that operates in Europe and Asia, threatening to lock Avis out of promising emerging-market growth areas. Meanwhile, at home, Zipcar (NAS: ZIP) provides an alternative to the traditional rental experience that could tap Avis's domestic presence as well.
Avis remains profitable and trades at a low valuation. But until the company proves its viability now that its merger hopes are apparently over, Avis won't be a 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.
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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Zipcar and Hertz Global Holdings.Motley Fool newsletter serviceshave recommended buying shares of Zipcar and priceline.com. 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.
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