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 Peet's Coffee & Tea (NAS: PEET) 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 Peet'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 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Peet's last year, the stock has kept its two-point score. Even as its share price soars, Peet's doesn't seem to be making much progress on the business front, with weak margins, high valuations, and a definite lack of newsworthy events in an industry that's been hopping lately.
In the past year, there have been numerous developments in the coffee space. Dunkin' Brands (NAS: DNKN) went public last summer, giving investors another way to play the industry with Dunkin's focus on the Northeast. Even more importantly, Green Mountain Coffee Roasters (NAS: GMCR) entered into a big partnership with Starbucks (NAS: SBUX) about a year ago, giving Starbucks access to Green Mountain's booming Keurig K-Cup business. Yet just last week, Starbucks said it would also go forward with its own single-serve machine to compete against Green Mountain.
All the while, Peet's has seen modest growth, with sales coming from its retail locations and also through K-Cups of its own. But in its most recent quarter, Peet's fell short of earnings expectations. As margins have been weakening, the company has had more difficulty keeping its profits up. Moreover, both it and Caribou Coffee (NAS: CBOU) are having to deal with the challenge of rising costs from wholesale coffee prices.
Peet's won't reach perfection without some sort of blockbuster deal. The stock is still priced as though one of the bigger players in the industry will buy it out. Unless that happens, there's only so much further the stock can go before it comes down to more reasonable valuations.
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 contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks, as well as creating a lurking gator position in Green Mountain Coffee Roasters and writing covered calls on Starbucks. 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 a disclosure policy.
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