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 Green Mountain Coffee Roasters (NAS: GMCR) 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 Green Mountain Coffee Roasters.
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%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
When we looked at Green Mountain Coffee Roasters last year, it managed to score five points, so the stock has fallen off the pace somewhat since then. Falling returns on equity are the culprit, but the company has still seen spectacular sales growth.
Green Mountain is a great example of how stocks can keep soaring even when many people are convinced that they're overpriced. Despite a sky-high earnings multiple and skepticism from many quarters about its future prospects, Green Mountain has been one of the best performing stocks of 2011.
The company owes its success to its popular Keurig single-cup coffee machine, which has been driving sales higher. During its most recent quarter, the company saw sales double and profits nearly triple as customers have to buy high-margin K-cups for their machines. The company expects sales to double for its fourth quarter as well and pushed up earnings guidance. With coffee giant Starbucks (NAS: SBUX) joining competitors like Caribou Coffee (NAS: CBOU) to provide K-cups, Green Mountain's machine has hit the big time.
That doesn't mean that it's all clear sailing for Green Mountain. With newly public Dunkin' Brands (NAS: DNKN) competing strongly, the coffeehouse business is still cutthroat. And with the company relying in part on retail space at sellers such as Sears (NAS: SHLD) and Safeway (NYS: SWY) for K-Cup sales, Green Mountain is vulnerable to the changing whims of shoppers.
For now, though, Green Mountain is running full-throttle and taking advantage of the coffee craze while it lasts. It may never become a perfect stock, but Green Mountain is making all the right moves during its boom times.
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
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