Has Travelzoo Become the Perfect Stock?

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 Travelzoo (NASDAQ: TZOO  ) 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 Travelzoo.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

13.9%

Fail

 

1-year revenue growth > 12%

1.9%

Fail

Margins

Gross margin > 35%

89.6%

Pass

 

Net margin > 15%

12%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

1.98

Pass

Opportunities

Return on equity > 15%

46.6%

Pass

Valuation

Normalized P/E < 20

18.76

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Travelzoo last year, the company has dropped a point, as revenue growth has come to a near-standstill. Its stock has also suffered, falling nearly 10% over the past year.

Travelzoo has a long history for an Internet-based company, having survived the tech bust to remain a player in the travel-deal space. Over time, Travelzoo has gone through multiple transformations, having gone from a mere subscription-based listing of top travel bargains to tap into the daily-deal trend that took over social media in recent years.

Unfortunately, the flash-deal model hasn't really worked well. Groupon (NASDAQ: GRPN  ) , which brought daily deals to the forefront, has persistently lost ground as it struggles to figure out how to go beyond its original business model to incorporate new services like payment processing. Restaurant social-media company OpenTable (UNKNOWN: OPEN.DL  ) also dabbled in the space before retreating to its core reservations business, and shares of the company have responded very favorably to the shift.

As a result, Travelzoo has moved away from daily deals, instead looking to return to its original business model while tapping into international growth. That's a strategy that travel-portal priceline.com (NASDAQ: PCLN  ) has executed to perfection, crushing its portal rivals over the years by creating a truly global network of hotels and other travel services that make it a go-to site for world travelers.

For Travelzoo to improve, it needs to mine those new sources of revenue and reawaken its growth. Otherwise, it'll have a lot of trouble getting much closer to perfection.

Keep searching
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.

With Travelzoo and others abandoning daily deals, the implications on Groupon are frightening. To find out whether Groupon is doomed to failure in its core business, be sure to check out the Fool premium research report. Inside, you'll find in-depth analysis that focuses on whether you should buy or sell Groupon right now, and why. Simply click here now to get started.

Click here to add Travelzoo to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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