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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 Starbucks (Nasdaq: SBUX ) 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 Starbucks.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.5%||Fail|
|1-Year Revenue Growth > 12%||9.3%||Fail|
|Margins||Gross Margin > 35%||57.7%||Pass|
|Net Margin > 15%||10.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||12.6%||Pass|
|Current Ratio > 1.3||1.83||Pass|
|Opportunities||Return on Equity > 15%||30.9%||Pass|
|Valuation||Normalized P/E < 20||33.55||Fail|
|Dividends||Current Yield > 2%||1.4%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Starbucks started paying a dividend in April 2010. Total score = number of passes.
Since we looked at Starbucks last year, the coffee giant has kept the same score. But the company's stock has soared as growth in new markets has overwhelmed concerns about costs and competition.
Naysayers for Starbucks have focused on the competition they face domestically. McDonald's (NYSE: MCD ) has had great success undercutting Starbucks with its McCafe line of coffee drinks, which put Starbucks on the defensive. The IPO of Dunkin' Brands (Nasdaq: DNKN ) also raised awareness that Starbucks doesn't have as wide a moat in the U.S. as it might prefer. Meanwhile, Starbucks recently raised prices in an attempt to recoup lost profits from a past spike in coffee prices.
Where Starbucks shines, however, is in its international scope. Whereas many have commented that the company may have saturated its markets in the U.S., there's a lot more room for Starbucks to grow overseas, despite its already substantial presence internationally.
In addition, Starbucks wasn't afraid to make smart strategic decisions. Rather than making an expensive foray into single-serve coffeemakers, Starbucks chose instead to partner up with Green Mountain Coffee Roasters (Nasdaq: GMCR ) , agreeing to produce K-Cups to boost its consumer products division. Starbucks also decided to buy juice company Evolution Fresh, taking on both specialty juice purveyor Jamba (Nasdaq: JMBA ) as well as Coca-Cola and PepsiCo and their juice lines. Given that Jamba had back-to-back profitable quarters last year for the first time since its 2005 IPO, it looks like Starbucks could have a money-making opportunity in the space.
With attempts to boost sales and increase margins, Starbucks is taking the right steps to get closer to perfection. Although shares are pricey, the company's move to boost its dividend recently demonstrates a commitment to shareholders -- one that makes the stock more attractive than its four-point score would indicate.
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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