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 Royal Caribbean Cruises (NYSE: RCL ) 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 Royal Caribbean.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.4%||Fail|
|1-Year Revenue Growth > 12%||12.7%||Pass|
|Margins||Gross Margin > 35%||34.8%||Fail|
|Net Margin > 15%||8.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||103.1%||Fail|
|Current Ratio > 1.3||0.40||Fail|
|Opportunities||Return on Equity > 15%||7.5%||Fail|
|Valuation||Normalized P/E < 20||14.59||Pass|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||(7.8%)||Fail|
|Total Score||2 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only two points, Royal Caribbean looks like it's sailing into shark-infested waters. The cruise line may offer customers a one-stop shop for entertainment and travel, but its financials may leave you feeling seasick.
Royal Caribbean is the operator behind Celebrity Cruises and has a fleet of about 40 ships that offer perks like rock-climbing walls, surf simulators, and even ice-skating rinks. With peers taking shots at their own demographic niches -- Carnival (NYSE: CCL ) goes after the budget-conscious while Disney (NYSE: DIS ) hits young families -- Royal Caribbean has focused on the active crowd. But that hasn't stopped the line from also treading on competitors' turf, with its own partnership with DreamWorks Animation (Nasdaq: DWA ) to feature characters like Shrek on Royal Caribbean ships.
Unfortunately, cruise lines do best in a strong economy, and that's been sorely lacking lately. In addition, uprisings in areas like Egypt have soured some potential travelers from going abroad for cruises, and high fuel costs are hitting ship operators' bottom lines. In addition, Royal Caribbean itself announced in July that it would have to make some accounting restatements in past periods, spooking investors.
With cruise lines fighting one another with ever more attractive services, companies like onboard spa operator Steiner Leisure (Nasdaq: STNR ) have a lot of leverage to extract profits. That, along with the unfavorable macroeconomic trends that the company faces, is likely to keep Royal Caribbean from sailing into a perfect sunset for the foreseeable future.
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 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."