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 Chipotle Mexican Grill (NYSE: CMG ) 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 all 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 that 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 Chipotle.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||24.5%||Pass|
|1-Year Revenue Growth > 12%||17.9%||Pass|
|Margins||Gross Margin > 35%||37.6%||Pass|
|Net Margin > 15%||9.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.5%||Pass|
|Current Ratio > 1.3||3.34||Pass|
|Opportunities||Return on Equity > 15%||22.8%||Pass|
|Valuation||Normalized P/E < 20||40.87||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Chipotle scores a tasty six points. The innovative fast-food eatery has done a good job of taking advantage of the challenging economic environment over the past several years, but even with recovery taking hold, the company seems poised to continue its growth run.
The restaurant industry hasn't been kind to some companies lately. Brinker International (NYSE: EAT ) , which offers mid-range eateries like Chili's, has seen falling revenue in recent years. Sonic (Nasdaq: SONC ) and Denny's (Nasdaq: DENN ) have gone through similar problems.
But Chipotle is firing on all cylinders. In its most recent quarter, net income rose nearly 40% on a 23% jump in revenue. Comps jumped over 11%, as high traffic raised margins and created exactly the kind of organic growth you'd want to see.
The company also isn't resting on its past successes. It's planning to launch an Asian-themed restaurant chain along the same lines as Chipotle's Mexican theme. Given Chipotle's reputation for social responsibility, thanks to its Food With Integrity mission, there's reason to think loyal customers will try out the new offerings once they're available.
Unfortunately, Chipotle shares aren't as good a value as its burritos are right now. But paying up to invest has been a winning move in the past, with the stock having quadrupled in just the past two years. Chipotle may not serve up a perfect menu of financial metrics, but shareholders have been happy.
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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