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 Avis Budget Group (Nasdaq: CAR ) 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 Avis Budget Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.2%||Fail|
|1-Year Revenue Growth > 12%||25.2%||Pass|
|Margins||Gross Margin > 35%||29.9%||Fail|
|Net Margin > 15%||(0.5%)||Fail|
|Balance Sheet||Debt to Equity < 50%||2367.4%||Fail|
|Current Ratio > 1.3||1.15||Fail|
|Opportunities||Return on Equity > 15%||(6.3%)||Fail|
|Valuation||Normalized P/E < 20||8.07||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Avis Budget Group last year, the company hasn't been able to improve on its two-point score. Yet the rental company looks like it's getting something right, as its stock has risen more than 40% in the past year.
The rental car industry is somewhat economically sensitive, and so the slow-growth environment we've seen since the formal end of the recession hasn't been the best for Avis and its profitability. But the company has been making some moves to try to bolster its growth, most notably its acquisition of Avis Europe and its added exposure not just to European markets but also to India, China, and areas in the Middle East and Africa.
Moreover, Avis Budget has worked to expand its partnerships with other travel-related services. United Continental (NYSE: UAL ) now has made Avis its "preferred car rental partner," which will give it exposure on booking websites and other United Continental marketing materials.
One area of potential growth that Avis Budget has been exploring is car-sharing. Although Zipcar (Nasdaq: ZIP ) pioneered the idea of renting cars by the hour rather than by the day, Hertz Global (NYSE: HTZ ) has been moving toward offering Zipcar-like features to its customers, and Avis has been doing a test of a car-sharing platform on its corporate fleet. The move should help Avis defend its turf against Zipcar and other upstarts.
But one move that seems unlikely to happen is a merger with Dollar Thrifty Group (NYSE: DTG ) . Hertz has been after Dollar Thrifty for years, but Avis recently said that it wouldn't renew a previous bid to try to buy the company.
For Avis to improve, it needs a stronger economy to help it boost profitability. Until that happens, Avis Budget will remain a long way from perfection.
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 the best investments from the rest.
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