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 Caribou Coffee (Nasdaq: CBOU ) 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 Caribou Coffee.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.7%||Fail|
|1-Year Revenue Growth > 12%||9.3%||Fail|
|Margins||Gross Margin > 35%||18.9%||Fail|
|Net Margin > 15%||11.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.64||Pass|
|Opportunities||Return on Equity > 15%||47.2%||Pass|
|Valuation||Normalized P/E < 20||28.81||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With three points, Caribou Coffee isn't brewing up perfection. The world of coffee has changed a lot in recent years, and despite impressive share price growth, the company is seeing slowing growth.
The name of the game in coffee used to be creating a coffeehouse environment for customers. During that period, Starbucks (Nasdaq: SBUX ) pioneered the mass-marketing of coffeehouses, and competitors like Peet's Coffee & Tea (Nasdaq: PEET ) and Caribou also prospered. Caribou in particular focused on the Midwest, where it has built a strongly entrenched competitive advantage.
More recently, though, new trends have hit the coffeehouse scene. Lower-price competition from McDonald's (NYSE: MCD ) and Dunkin' Brands (Nasdaq: DNKN ) challenged Caribou and its higher-priced peers. At the same time, the Keurig machine from Green Mountain Coffee Roasters (Nasdaq: GMCR ) went even further, allowing people to make their own coffee much more cheaply while still retaining the convenience of single-cup servings.
To answer that call, Caribou provides K-Cups for use in Green Mountain Keurig machines. But with Starbucks having also agreed to work in partnership with Green Mountain, it's uncertain whether Caribou will be able to compete.
The eventual answer might be a buyout, as happened with Diedrich Coffee. Absent that, though, Caribou could continue to face volatility in coffee prices and the resulting impact on margins. With a lofty forward earnings multiple, Caribou will need to meet already-high expectations in order to 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."