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 Starwood Hotels 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 Starwood Hotels.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Starwood Hotels last year, the company has tripled its score, with better revenue growth and strongly higher dividends. The stock has also done reasonably well, rising about 10% over the past year.
Starwood is just one player in a highly competitive industry that has been under pressure from poor economic conditions. But along with Intercontinental Hotels Group , Starwood has been more exposed to weaker economic forecasts around the world, as Starwood gets nearly 40% of its revenue abroad, and Intercontinental has a roughly 50/50 split between its Americas divisions and the rest of the world. With a strong dollar and improving business conditions within the U.S., Starwood has had a competitive disadvantage to more domestically focused chains, as peers Hyatt Hotels and Wyndham Worldwide , for which international revenue is a much lower 20% to 30%.
Moreover, Starwood has taken massive steps toward getting its debt under control. In December, it offered $350 million in 10-year notes at interest rates of just 3.125%, planning to use the proceeds to retire notes paying 7% to 8% in interest due over the next six years. By taking advantage of low rates now, Starwood will avoid any unpleasantness in having to refinance those notes as they mature.
For Starwood to improve, it needs Europe to get out of its malaise and start attracting business travelers again. That could take a while, though, but Starwood has made big strides toward getting closer to perfection and could continue to make progress in the years to come.
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.
The best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Has Starwood Hotels Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.