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 priceline.com (Nasdaq: PCLN ) 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 Priceline.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||29.2%||Pass|
|1-Year Revenue Growth > 12%||38.9%||Pass|
|Margins||Gross Margin > 35%||65.8%||Pass|
|Net Margin > 15%||19.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||28%||Pass|
|Current Ratio > 1.3||2.11||Pass|
|Opportunities||Return on Equity > 15%||41.4%||Pass|
|Valuation||Normalized P/E < 20||52.98||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of 7, Priceline has taken shareholders on a nice ride. The travel portal has dominated its competition with its unique spin on the business, and it's hard to see how competitors will catch up.
You'd have to be hiding under a rock to have missed Priceline's campy ads with William Shatner. But judge the message rather than the messenger. Customers clearly like the ability to pick a price they're willing to pay and see if the portal can match it. It gives Priceline a huge edge over traditional travel portals like Expedia (Nasdaq: EXPE ) and Orbitz Worldwide (NYSE: OWW ) , which offer you the same take-it-or-leave-it that you'll find from airline and hotel sites themselves.
Some point to the success of more social-media savvy operators like Travelzoo (Nasdaq: TZOO ) , which has been expanding its Local Deals business lately. But with such a huge lead in the industry, Priceline hasn't ignored social media entirely -- and it has done an excellent job finding the deals it needs to boost its profits.
Moreover, the future still looks bright even in a tough economy. Last week, Priceline not only beat earnings estimates by a huge margin but also pushed up guidance for the third quarter by more than $1 per share.
From those numbers, it's clear where Priceline gets its steep valuation. But for those willing to pay up, Priceline has been a good deal for years -- and it might just become the perfect stock for your portfolio.
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."