Is Green Mountain Coffee Roasters the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Green Mountain Coffee Roasters (Nasdaq: GMCR  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Green Mountain.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 50.4% pass
  1-Year Revenue Growth > 12% 68.8% pass
Margins Gross Margin > 35% 32.3% fail
  Net Margin > 15% 5.8% fail
Balance Sheet Debt to Equity < 50% 41.4% pass
  Current Ratio > 1.3 1.86 pass
Opportunities Return on Equity > 15% 16.3% pass
Valuation Normalized P/E < 20 42.36 fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Green Mountain scores a middle-of-the-road 5 by these measures. With such fast growth, it's not surprising that the company falls short on items like dividends and valuation. Stocks in their prime growth years often need to reinvest all their spare cash into their business, rather than rewarding shareholders directly. Industry pioneer Starbucks (Nasdaq: SBUX  ) started paying a dividend just this year, and lately, it's been a much slower grower than Green Mountain.

Unfortunately, Green Mountain has some headwinds to face. Higher coffee prices at the producer level have already forced Kraft Foods (NYSE: KFT  ) and JM Smucker (NYSE: SJM  ) to pass on price hikes to customers, and Green Mountain plans to follow suit despite a threat from McDonald's (NYSE: MCD  ) to hold the line on its own price points.

More troublesome, though, is the SEC's investigation into how Green Mountain accounts for its revenue, as they call the company's past reporting into question. Short-sellers are salivating at the stock's recent drop, but if the SEC inquiry turns out to be minor, then prices could resume their upward run.

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.

Want to own the perfect stock? Click here to read our special report, 5 Stocks The Motley Fool Owns -- And You Should Too.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Starbucks is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 12, 2010, at 4:52 PM, refriedbean wrote:

    Did this article say anything? I'm still working on it, but I haven't got there yet.

  • Report this Comment On October 12, 2010, at 7:21 PM, LQM2 wrote:

    This article is really superficial. Problems with measures include:

    PE only has meaning relative to a sustainable growth rate

    Margins are industry and strategy specific, there is no "right" margin.

    You don't want any dividends if the company can plow cash back into profitable growth.

    GMCR does have a somewhat high PE, but that depends on how long you think they can sustain growth. Coffee prices have risen, but GMCR has pricing power with loyal customers. And the SEC thing is bull...its a perfect time to buy now.

    You Fools have favored SBUX over GMCR for years. And missed! Ask Alyce Lomax, lol.

  • Report this Comment On October 12, 2010, at 8:18 PM, plange01 wrote:

    green mountain is a great stock to own and a possible takeover candidate by nestle sa

  • Report this Comment On October 13, 2010, at 2:03 PM, swagv wrote:

    Green Mountain is a company that speaks out of one side of its mouth, trading on its 'green-friendly' reputation. Meanwhile, out of the other side it is profiting handsomely on its K-cups -- which have extensively raised the amount of materials extraction, materials production, and packaging waste with every served cup.

    In other words, they're trying to have it both ways. It's unsustainable, and this won't end pretty.

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