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 DineEquity (NYSE: DIN ) 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 DineEquity.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||23.8%||Pass|
|1-Year Revenue Growth > 12%||(20%)||Fail|
|Margins||Gross Margin > 35%||39.7%||Pass|
|Net Margin > 15%||7.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||839.9%||Fail|
|Current Ratio > 1.3||0.94||Fail|
|Opportunities||Return on Equity > 15%||48.3%||Pass|
|Valuation||Normalized P/E < 20||11.25||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at DineEquity last year, the company has picked up a point. Better returns on equity are behind the improvement, but shareholders haven't benefited, as the stock has dropped about 20% in the past year.
You may not know DineEquity's name, but you may be more familiar with its Applebee's and IHOP restaurant chains. With relatively inexpensive casual dining, DineEquity did well during strong economic times when people could afford to eat out more often. Unfortunately, when times got tough, DineEquity lost its momentum and fell sharply in the market meltdown from 2008 to 2009.
Since then, the company has bounced back pretty strongly. But DineEquity still isn't at the top of its game. Darden Restaurants (NYSE: DRI ) has a lock on customer loyalty according to the American Customer Satisfaction Index, outperforming both Brinker International (NYSE: EAT ) and DineEquity.
Still, DineEquity does have some advantages. Its strong operating margins stand up to the best in the business and even top Buffalo Wild Wings (Nasdaq: BWLD ) , which has had a lot of success in recent years even under difficult conditions for restaurants. Moreover, the company has had same-store sales hold up better than at Ruby Tuesday (NYSE: RT ) , which has faced even more challenges.
For DineEquity to improve, what the restaurant chain really needs is a boost in the overall economy. Once ordinary people have more money to spend, they'll eat out more, and DineEquity will benefit. Until that happens, though, DineEquity will struggle to make much headway toward becoming 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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