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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 PetMed Express (Nasdaq: PETS ) 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 PetMed Express.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8%||Fail|
|1-Year Revenue Growth > 12%||2.9%||Fail|
|Margins||Gross Margin > 35%||33.6%||Fail|
|Net Margin > 15%||7%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||9.33||Pass|
|Opportunities||Return on Equity > 15%||18.7%||Pass|
|Valuation||Normalized P/E < 20||14.54||Pass|
|Dividends||Current Yield > 2%||5.2%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; PetMed Express paid its first dividend in Aug. 2009. Total score = number of passes.
Since we looked at PetMed Express last year, the company has dropped a point. A decline in margins is responsible for the score loss, and its shares haven't performed all that well in the past year either.
The pet-care retail area may sound like a niche market, but it's a big niche. With around $50 billion in annual spending on pets, there's a huge pie for players to divide. PetSmart (Nasdaq: PETM ) and privately held Petco divide up most of the big-box retail space for pets, but neither they nor traditional retailer Target (NYSE: TGT ) , which carries standard pet supplies, can handle the pet prescription medicines that are PetMed Express' bread and butter.
But PetMed doesn't have the space to itself. Although VCA Antech (Nasdaq: WOOF ) aims more at the veterinary services that animals need when they're sick, it also provides home delivery of prescriptions. Similarly, MWI Veterinary (Nasdaq: MWIV ) has seen growth in its home delivery pharmacy segment even as it focuses on supplying local veterinary hospitals, too.
PetMed has seen decent growth in its customer base, but it has had to spend huge amounts of advertising in order to get there. In its most recent quarter, the company saw operating costs rise at a faster rate than revenue, causing the shares to plunge nearly 20% after its earnings release.
For PetMed to get back on the path to improvement, it needs to find ways to boost its growth and get its margins back up. With increased competition, that's a tall order, but with a well-known brand, PetMed may be able to get closer to perfection if consumer trends cooperate with the business.
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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