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 PetMed Express
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 PetMed Express.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 11.0% | Fail |
| 1-Year Revenue Growth > 12% | (2.8%) | Fail | |
| Margins | Gross Margin > 35% | 36.2% | Pass |
| Net Margin > 15% | 9.0% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0.0% | Pass |
| Current Ratio > 1.3 | 10.00 | Pass | |
| Opportunities | Return on Equity > 15% | 21.5% | Pass |
| Valuation | Normalized P/E < 20 | 14.08 | Pass |
| Dividends | Current Yield > 2% | 3.9% | Pass |
| 5-Year Dividend Growth > 10% | NM | NM | |
| Total Score | 6 out of 9 |
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; PetMed started paying a dividend in 2009. Total score = number of passes.
With a score of 6, PetMed Express puts up a good showing. The mail-order veterinary medicine company has tapped into America's love affair with pets and their desire for quick, convenient delivery of the things they need.
PetMed's goal is very simple: to become for pet medicines what Amazon.com
That said, PetMed doesn't have a huge share of that market right now, at only about 6%. And even worse, revenue growth has slowed considerably, even reaching a slight drop over the past year. Analysts have noticed the problem, and shareholders are feeling the pinch.
Until the company manages to return to a growth trajectory, PetMed isn't going to become shareholders' best friend. But just as Walgreen's
Keep searching
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
