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 Expedia (Nasdaq: EXPE ) 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 Expedia.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||10.2%||Fail|
|1-Year Revenue Growth > 12%||13.7%||Pass|
|Margins||Gross Margin > 35%||79.4%||Pass|
|Net Margin > 15%||12.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||59.4%||Fail|
|Current Ratio > 1.3||0.92||Fail|
|Opportunities||Return on Equity > 15%||15.5%||Pass|
|Valuation||Normalized P/E < 20||22.50||Fail|
|Dividends||Current Yield > 2%||0.9%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||3 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Expedia started paying a dividend in May 2010. Total score = number of passes.
With just 3 points, Expedia doesn't take you very far toward perfection. The online travel site has gotten into some big controversies lately, but its shares haven't been able to keep up with the industry's front-runner.
Expedia offers a one-stop shopping site for airfares, rental cars, hotels, and other travel-related amenities. In addition to its namesake website, the company also owns Hotwire, Hotels.com, and a stake in Chinese company eLong (Nasdaq: LONG ) .
The travel portal business is lucrative for Expedia and its peers. But airlines have tried to defend their turf. Late last year, American parent AMR (NYSE: AMR ) got into a dispute with Expedia and Orbitz Worldwide (NYSE: OWW ) over compensation terms, which resulted in Expedia's decision to take American fares off its site for a few months. Expedia has resolved the issue, but it's unclear whether future disputes could be in the offing.
Meanwhile, Expedia has been taking steps to keep up with its competitors, which are growing faster than it is. The company is working with social-discount giant Groupon on its Groupon Getaways, seeking to take on Priceline.com (Nasdaq: PCLN ) and Travelzoo (Nasdaq: TZOO ) and their direct-emailed discount offers.
Expedia is a tough sell to investors. It lags behind Priceline, yet its shares aren't cheap enough to be an obvious value. Only by finally differentiating itself from its competitors can Expedia become a perfect stock.
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.