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 Peet's Coffee & Tea (Nasdaq: PEET ) 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 Peet's.
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just two points, Peet's isn't giving shareholders the jolt that its customers get from their morning coffee. But takeover prospects have kept things interesting for investors.
Among coffee-related companies, Peet's doesn't stand up well to the competition when it comes to financials. Its margins badly trail those of longtime established industry leader Starbucks (Nasdaq: SBUX ) , yet it certainly hasn't been able to match the explosive growth of up-and-comer Green Mountain Coffee Roasters (Nasdaq: GMCR ) . Even tiny competitor Caribou Coffee (Nasdaq: CBOU ) manages much better returns on equity.
But Peet's still carries a very high valuation. Much of the excitement in the stock has come from speculation that other coffee companies would enter into partnerships with the company. Starbucks turned Peet's down as a prospective partner, but rumors that Green Mountain would announce a partnership vaulted the stock up sharply yesterday.
With slowing growth, some troublesome signs in the company's compensation structure, and cash flow concerns, Peet's doesn't look likely to perform well without a major partnership. For now, Peet's isn't brewing up perfection for prospective investors.
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.
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