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 Groupon (Nasdaq: GRPN ) 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 Groupon.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||NM||NM|
|1-Year Revenue Growth > 12%||232.2%||Pass|
|Margins||Gross Margin > 35%||81.9%||Pass|
|Net Margin > 15%||(9.7%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||1.30||Pass|
|Opportunities||Return on Equity > 15%||(51.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 8|
Source: S&P Capital IQ. NM = not meaningful; Groupon only has significant revenue since 2009 and had negative earnings over the past 12 months. Total score = number of passes.
With four points, Groupon puts in a fairly respectable performance. But investors have gotten burned by the stock, which has fallen 45% from its IPO price.
Groupon is at the center of one of the pioneering business models of social media, offering businesses a chance to bring in customers through locally targeted discounts on their products and services. The excitement over that business model helped drive huge demand for its initial public offering back in November, in which the company raised its offering price above its expected range and boosted the number of shares offered.
But Groupon has also been the center of controversy. The IPO revealed some questionable accounting methods about how Groupon treated revenue, and the company then suffered the embarrassment of having to restate its earnings for its first quarter as a public company. This hurt investor confidence in the company right off the bat.
More importantly for Groupon's long-term prospects, the business model has proven to be vulnerable. Amazon.com (Nasdaq: AMZN ) invested in rival site LivingSocial, while several other companies targeted certain niches of the daily deal space. Travelzoo (Nasdaq: TZOO ) , for instance, created a travel-related daily deals service to go with its bargain offerings, while eBay (Nasdaq: EBAY ) has also started doing deals of its own. Meanwhile, OpenTable (Nasdaq: OPEN ) actually gave up on its foray into the deals space after some of its restaurant partners found it problematic.
Groupon faces a tough road ahead to try to improve. With many questioning the viability of its entire business model, Groupon may never become a perfect stock.
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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