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 Einstein Noah Restaurant Group (Nasdaq: BAGL ) 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 Einstein Noah Restaurant Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.0%||Fail|
|1-Year Revenue Growth > 12%||1.3%||Fail|
|Margins||Gross Margin > 35%||21.5%||Fail|
|Net Margin > 15%||2.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||91.9%||Fail|
|Current Ratio > 1.3||1.04||Fail|
|Opportunities||Return on Equity > 15%||13.4%||Fail|
|Valuation||Normalized P/E < 20||19.43||Pass|
|Dividends||Current Yield > 2%||3.5%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||2 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Einstein Noah just started paying a dividend in February 2011. Total score = number of passes.
With a score of only two, Einstein Noah Restaurant Group isn't making its investors feel full. The company has one of Wall Street's most famous value investors behind it, but the business has plenty of challenges to overcome.
Einstein Noah sells bagels and sandwiches through both company-owned stores and franchises. Prior to 2001, Boston Market had a majority stake in the restaurant company, but after a bankruptcy, the company reorganized to go public in 2007 and become the largest bagel-focused restaurant chain in the country. In addition, Einstein Noah attracted the notice of value investor David Einhorn, who bought a 64% stake in the company.
But despite that vote of confidence, Einstein Noah hasn't yet delivered on its promise. Unlike Panera Bread (Nasdaq: PNRA ) , which has better margins that have improved over time, Einstein Noah's margins are razor-thin and have deteriorated lately. And although its valuation is far cheaper than either fellow dough-sellers Panera and Dunkin' Brands (Nasdaq: DNKN ) or other hot food-and-beverage chains such as Chipotle (NYSE: CMG ) and Starbucks (Nasdaq: SBUX ) , Einstein Noah simply doesn't sport the growth that those rivals enjoy.
In order to get closer to scoring a 10 than a bagel, Einstein Noah needs to boost every phase of its game. A good start would be to work on getting its debt under control, and then work to beat back higher ingredient costs to improve margins. Only by accomplishing that will Einstein Noah eventually cook up a perfect score to go with its yummy bagels.
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."