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 Ruby Tuesday (NYS: RT) 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 Ruby Tuesday.
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%
0 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Without a single point, Ruby Tuesday earns a rare goose egg on our scale. The restaurant chain has had only tepid performance lately, and the stock's lackluster returns reflect that lack of enthusiasm as well.
The recession was a tough time for casual-dining restaurants like Ruby Tuesday. Customers economized to cut overall expenses, hurting growth. Meanwhile, food cost inflation forced even giants McDonald's (NYS: MCD) and Starbucks (NAS: SBUX) to raise prices on customers. That caused some problem for those large chains, but for Ruby Tuesday, similar headwinds have had a much bigger effect, clamping down on the company's margins and cutting into profits even further.
But Ruby Tuesday is taking bold steps to retrench. Last year, it bought more than 100 of its franchises, with the hope of having company-owned stores perform better. For now, they're still money losers, and the buyout raised Ruby Tuesday's debt levels as well.
Moreover, Ruby Tuesday is branching out to new concepts. Its Lime Fresh Mexican Grill is a clear attack on Chipotle (NYS: CMG) , which has dominated the Mexican-food space for years. Other concepts could also add to profits going forward.
Ruby Tuesday is just one player in a highly competitive industry. Even as the economy strengthens, the company has to prove why it's a better choice for diners than the huge number of other chains out there. Obviously, there's plenty of room to improve, but it'll be a long while before Ruby Tuesday has a chance at perfection.
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 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. The Motley Fool owns shares of Chipotle and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, McDonald's, and Chipotle, as well as writing covered calls on Starbucks and creating a bear put spread position on Chipotle. 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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