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 OpenTable (Nasdaq: OPEN ) 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 OpenTable.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||39.9%||Pass|
|1-Year Revenue Growth > 12%||54.3%||Pass|
|Margins||Gross Margin > 35%||71.9%||Pass|
|Net Margin > 15%||15.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.92||Pass|
|Opportunities||Return on Equity > 15%||18.3%||Pass|
|Valuation||Normalized P/E < 20||87.12||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 seven points, OpenTable has a reservation for perfection. The online dining facilitator has seen some amazing growth during its young existence, but a lot depends on the near future to see if it can successfully overcome competition and a tough economic environment.
OpenTable helps would-be diners make reservations online at participating restaurants. Although the company has some competition from IAC/Interactive's (Nasdaq: IACI ) Rezbook, OpenTable is still the most popular choice in the space.
One recipe for OpenTable's growth came when it started to sell prepaid deals in the restaurant area. Like various travel sites including priceline.com (Nasdaq: PCLN ) , Expedia (Nasdaq: EXPE ) , and Travelzoo (Nasdaq: TZOO ) , OpenTable hoped to use couponing as a way to monetize its popularity.
But increasingly, other companies are giving up on trying to compete with the top dogs in key niche areas. Last month, Facebook and Yelp decided to scale back or cease altogether plans to offer Groupon-like daily deals. That hasn't stopped OpenTable or Travelzoo from using social coupons, but it could spell the beginning of the end of the big growth phase for them.
OpenTable's most recent quarter shows what the company is up against. Sales rose 53% and adjusted earnings beat expectations, but investors punished the shares because they wanted to see even faster revenue growth.
OpenTable has performed quite well, but it still has hard work ahead of it. To survive into the next phase of the social boom, it will have to keep growing at a breakneck pace in order to satisfy the demands of both its customers and its shareholders.
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."