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 Rick's Cabaret (Nasdaq: RICK ) 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 Rick's Cabaret.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||27.8%||Pass|
|1-Year Revenue Growth > 12%||12.7%||Pass|
|Margins||Gross Margin > 35%||65.6%||Pass|
|Net Margin > 15%||9.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||44.3%||Pass|
|Current Ratio > 1.3||1.11||Fail|
|Opportunities||Return on Equity > 15%||13.4%||Fail|
|Valuation||Normalized P/E < 20||11.06||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of five, Rick's Cabaret finishes in the middle of the pack. The gentlemen's-club operator has seen some impressive growth in recent years, but the stock has largely languished for well over a decade.
So-called "sin stocks" raise an ethical conundrum for many investors. While few would argue that cigarette maker Altria (NYSE: MO ) or liquor company Diageo (NYSE: DEO ) aren't legitimate businesses making solid profits, some still aren't comfortable with the idea of making money from practices that they personally feel are questionable. Yet other investors take advantage of that squeamishness, figuring that company's like Rick's offer even better investment opportunities because some of their investing peers avoid bidding the shares up.
Until the recession hit, Rick's looked like a company with unlimited potential. Like many sin stocks, Rick's has a loyal customer base, and its nightclubs tend to see solid demand -- as long as money's flowing through the economy into corporate expense accounts and bonuses.
But in recent years, the company ran into bad timing. It bought a club in Las Vegas several years ago, figuring that it was a natural growth opportunity. But then the economy went south, and as Vegas-casino players MGM Resorts (NYSE: MGM ) and Las Vegas Sands (NYSE: LVS ) pulled out the stops to keep a dwindling customer base within their own walls, Rick's found itself on the outside with a big loss on its hands.
For Rick's to get on track for perfection, it needs to stick with its more conservative plan of organic expansion and the occasional acquisition. If it can do so, then Rick's could find itself regaining some of its lost ground since 2008 over the next few years.
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.
Click here to add Rick's Cabaret to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.