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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 Barnes & Noble (NYSE: BKS ) 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 Barnes & Noble.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.8%||Fail|
|1-Year Revenue Growth > 12%||1.9%||Fail|
|Margins||Gross Margin > 35%||26.8%||Fail|
|Net Margin > 15%||(1%)||Fail|
|Balance Sheet||Debt to Equity < 50%||50.5%||Fail|
|Current Ratio > 1.3||1.09||Fail|
|Opportunities||Return on Equity > 15%||(7.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||0 out of 9|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Barnes & Noble last year, the company has lost its last point. With that as context, the book retailer's roughly 15% drop in share price over the past year doesn't seem all that bad.
Barnes & Noble is the last player standing in the war between online and bricks-and-mortar bookstores. With Amazon.com (Nasdaq: AMZN ) continuing to soar to new heights, it's pretty apparent who's winning, even with the bankruptcy of Borders Group having removed a key B&N competitor.
But B&N has continued to fight, turning to its Nook e-reader and tablet for a life preserver. A few months ago, the company got some help from Microsoft (Nasdaq: MSFT ) , which invested $300 million for a stake in B&N's Nook business. That sent shares soaring temporarily, but with Amazon's Kindle and Apple's (Nasdaq: AAPL ) iPad having some competitive advantages over the Nook, that optimism quickly fizzled.
Moreover, as Microsoft's partnership with Nokia (NYSE: NOK ) shows, having the software giant on your side doesn't guarantee success. Given that Microsoft is planning its own Surface tablet to go up against the Kindle and the iPad, it's clear that the company doesn't plan to put all its hopes in the tablet/e-reader space on B&N.
Barnes & Noble is going to have a tough time improving under any circumstances. At this point, the best-case scenario for the company seems to be getting a buyer to see the potential value of the Nook as a gateway to a more extensive mobile product. Unless that happens, Barnes & Noble isn't likely to see perfection in the near future.
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.
Barnes & Noble isn't perfect, but we've got some other ideas for you to take a look at. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Also, if you think Apple is a better bet, learn more about it from our new premium research report on the company. In it, our top technology analyst walks through the key aspects of the Apple story, including both opportunities and risks facing the company.
Click here to add Barnes & Noble to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.