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 and then decide whether Roundy's (NYSE: RNDY ) 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.
- Moneymaking 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 Roundy's.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.1%*||Fail|
|1-Year Revenue Growth > 12%||2%||Fail|
|Margins||Gross Margin > 35%||26.8%||Fail|
|Net Margin > 15%||1.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||232.5%||Fail|
|Current Ratio > 1.3||1.25||Fail|
|Opportunities||Return on Equity > 15%||29.1%**||Pass|
|Valuation||Normalized P/E < 20||5.33||Pass|
|Dividends||Current Yield > 2%||12.3%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||3 out of 9|
Source: S&P Capital IQ.
NM = not meaningful; Roundy's went public in February 2012.
Total score = number of passes.
* 3-1/2 year growth rate.
** As of Dec. 31, 2011.
Roundy's weighs in with a score of just 3 points. So far, the newly public grocer hasn't done very well, with its stock having dropped well below its offering price.
As a small grocery-store chain based in Wisconsin, Roundy's may seem fairly unremarkable. But the company made an unusual splash in its IPO largely because of its huge dividend. Even at its offering price, the stock yielded more than 10% based on its first couple of quarterly payments.
But Roundy's has had a hard time posting good financial results. In the first quarter, same-store sales fell 2.1% and earnings per share took a nearly 80% hit. Even worse, it gave lower guidance, saying weak comps would continue throughout the year. Those problems continued in the grocer's second-quarter report, sending shares tumbling as much as 25%.
Roundy's experience isn't that unusual in the grocery industry. SUPERVALU (NYSE: SVU ) had to suspend its dividend recently because of poor results, and Safeway (NYSE: SWY ) and Kroger (NYSE: KR ) have faced higher costs for food and less discretionary income for consumers to spend. The only strength in the industry has come from premium grocers, with Whole Foods (Nasdaq: WFM ) continuing to dominate the space as its shoppers are willing to pay up for perceived quality.
For Roundy's to rebound, it needs to find a way past the trends that are hurting the entire industry. Being small gives it opportunities for growth, but Roundy's needs to distinguish itself from its peers if it wants to get closer to perfection in the years ahead.
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.
Roundy's may have potential, but Whole Foods has made all the right moves. Learn more about what Roundy's would have to do to match up with the grocery giant in the Fool's premium report on Whole Foods, which includes a year's worth of free updates to keep you up to speed with the latest developments. Try it today.
Add Roundy's to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.