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 Starwood Hotels (NYSE: HOT ) 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 Starwood Hotels.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(1.7%)||Fail|
|1-Year Revenue Growth > 12%||9.2%||Fail|
|Margins||Gross Margin > 35%||23%||Fail|
|Net Margin > 15%||12.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||110.7%||Fail|
|Current Ratio > 1.3||1.08||Fail|
|Opportunities||Return on Equity > 15%||22.1%||Pass|
|Valuation||Normalized P/E < 20||38.04||Fail|
|Dividends||Current Yield > 2%||0.9%||Fail|
|5-Year Dividend Growth > 10%||(27.2%)||Fail|
|Total Score||1 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Starwood Hotels last year, the hotelier has actually gotten itself out of the basement by picking up a point. Yet even with a big boost in returns on equity, the company has a long way to go to reach perfection.
Starwood hasn't seen great stock performance in the past year, although it dug itself out of an even deeper hole from the summer. With the Commerce Department's tourism office expecting an influx of international tourism over the next five years, especially from U.S. neighbors Canada and Mexico, as well as emerging-market nations Brazil and China, Starwood is in position to benefit greatly.
One potentially catastrophic error, however, may be Starwood's failure to get into the new Roomkey.com joint venture. The online booking site, which includes rivals Marriott (NYSE: MAR ) , Wyndham (NYSE: WYN ) , and four other major hotel chains, seeks to give the hoteliers leverage against online aggregators priceline.com (Nasdaq: PCLN ) and Expedia. In time, the site could also make it easy for the hotel chains to offer daily deals, countering Travelzoo (Nasdaq: TZOO ) and other travel-based deals websites.
For Starwood to keep up, it needs to demonstrate that it can compete not only against its long-established rivals but also innovative new lodging options like HomeAway's home-sharing service. A pickup in the economy will help, but longer-term, Starwood could take a while to get back to perfection.
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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