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 Coinstar (NAS: CSTR) 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 Coinstar.
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.
Since we looked at Coinstar last year, the company has picked up a point. Despite a nice share-price gain, valuations have come way down, pushing Coinstar's score up.
Coinstar may have started out as a way to get rid of loose change, but now everyone looks at it as a DVD provider, especially since more than 85% of its revenue comes from its Redbox DVD division. Given the highly contentious move by Netflix (NAS: NFLX) to separate out its streaming business from its DVD rental service, DVDs have come back into the limelight, and Coinstar is taking advantage of Netflix's gaffe to score some strong gains.
Coinstar's strategy has a two-pronged approach. On one hand, it bought out NCR's (NYS: NCR) DVD kiosk business, becoming the only major company using that distribution model. Given that DISH Network (NAS: DISH) has been closing Blockbuster stores, Coinstar and Netflix are rapidly becoming the biggest survivors of the DVD industry.
But Coinstar isn't giving up on the streaming side of content delivery. It recently teamed up with Verizon (NYS: VZ) to create a competing streaming video service that it hopes to bring to market later in 2012.
Last month, Coinstar shares soared after the company announced preliminary quarterly results. Coinstar boosted its guidance on both revenue and earnings growth, and when the actual numbers came out a couple of weeks later, they were largely in line with those upwardly adjusted figures.
For Coinstar to improve, it needs to recognize that the DVD business has a limited lifespan left. If it can make its streaming partnership with Verizon successful, that could be the key to Coinstar's success going forward.
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.
Coinstar isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click hereto add Coinstar to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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 Netflix. Motley Fool newsletter services have recommended buying shares of Coinstar and Netflix. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.