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 Caribou Coffee (Nasdaq: CBOU ) 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 Caribou Coffee.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.2%||Fail|
|1-Year Revenue Growth > 12%||11.6%||Fail|
|Margins||Gross Margin > 35%||16.5%||Fail|
|Net Margin > 15%||3.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.63||Pass|
|Opportunities||Return on Equity > 15%||11.6%||Fail|
|Valuation||Normalized P/E < 20||33.53||Fail|
|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 Caribou Coffee last year, the company has dropped a point, with returns on equity plunging. But the stock has remained popular, posting a 30% gain in the past year.
The coffee industry has evolved into big behemoths and tiny niche players. Caribou is one of the latter, and like fellow small company Coffee Holding (Nasdaq: JVA ) , Caribou does a lot of business with Green Mountain Coffee Roasters (Nasdaq: GMCR ) in supplying K-Cups for Green Mountain's Keurig single-serve brewer.
Green Mountain's fall from grace over the past year has called into question the future of the industry, especially as rival Starbucks (Nasdaq: SBUX ) has come out with its own single-serve brewing machine. For Caribou's part, recent earnings have been extremely disappointing, with net income falling 36% in its most recent quarter. Even worse, Caribou expects flat results for the rest of the year compared to 2011, although it believes that a stronger relationship with Green Mountain could boost earnings in 2013 and beyond.
But Caribou still has some potential. Lower coffee prices are likely to boost margins, which have been under pressure for some time. More importantly, with a private equity company agreeing to buy out competitor Peet's Coffee & Tea (Nasdaq: PEET ) , some believe Caribou and its small peers could be next in line.
For Caribou to improve, it needs a Green Mountain recovery to push sales higher. Given the stock's lofty valuation, though, a buyout may be the best exit strategy for shareholders going forward.
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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