Has Starwood Hotels Become the Perfect Stock?

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.

Factor

What We Want to See

Actual

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.

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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Click here to add Starwood Hotels to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Travelzoo, HomeAway, and priceline.com. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 25, 2012, at 3:28 PM, zebrasports133 wrote:

    It amazes me that most stock watchers don't have a real life understanding of what they write about. For example, I tried the www.roomkey.com web site you mentioned and hoped to get a room for this weekend and as you say, "cut out the middle man". FYI, the hotels available were still 20% higher than what I can get for a comparable hotel room on Priceline.

    I own Starwood Hotels stock and the room in Parsippany NJ that I was interested in was $89 on RoomKey, but I got the same room on Priceline for $69 (both plus applicable taxes) for this Starwoods Hotel room.

    What any hotel chain should do for loyal customers who surf to get the best price at any hotel, is to offer a set price for those repeat customers that rival Priceline prices. So when I need a room in St. Louis next weekend, it would be the same as I paid this weekend in Parsippany NJ. No rewards, no perks, just a set best price that I can factor into my weekend business costs. It also saves me a lot of time not having to play the game on Priceline until the price I am willingto pay is accepted.

    Thanks.

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