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 Shutterfly
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 Shutterfly.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 30.7% | Pass |
| 1-year revenue growth > 12% | 37.8% | Pass | |
| Margins | Gross margin > 35% | 53.4% | Pass |
| Net margin > 15% | 3% | Fail | |
| Balance sheet | Debt to equity < 50% | 0% | Pass |
| Current ratio > 1.3 | 3.00 | Pass | |
| Opportunities | Return on equity > 15% | 2.8% | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 5 out of 9 |
Source: S&P Capital IQ. NM = not meaningful because of negative normalized earnings. Total score = number of passes.
With a score of five, Shutterfly lands right in the center of the picture. But despite having a timely business for the season, the company faces some big competitive threats.
With the move to digital photography, photo processing has taken on an entirely new meaning. While film-focused companies like Eastman Kodak
Shutterfly has burst onto the scene with strong revenue growth that puts it in the same class as giants Amazon.com, priceline.com
Competitive concerns have recently arisen about Shutterfly. Shares fell sharply yesterday after one analyst pointed to competition from Hewlett-Packard's
The next year should be an interesting one for Shutterfly. If it can fend off the competition and find ways to boost margins, then it could finally get earnings moving as fast as sales. If not, though, the stock could be a lot further from perfection in the future.
Keep searching
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 ."
