Has Green Mountain Coffee Roasters 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 Green Mountain Coffee Roasters (Nasdaq: GMCR  ) 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 Green Mountain Coffee Roasters.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

64%

Pass

1-year revenue growth > 12%

94.5%

Pass

Margins

Gross margin > 35%

33%

Fail

Net margin > 15%

6.5%

Fail

Balance sheet

Debt to equity < 50%

23.4%

Pass

Current ratio > 1.3

2.14

Pass

Opportunities

Return on equity > 15%

12.2%

Fail

Valuation

Normalized P/E < 20

84.84

Fail

Dividends

Current yield > 2%

0%

Fail

5-year dividend growth > 10%

0%

Fail

Total score

4 out of 10

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

When we looked at Green Mountain Coffee Roasters last year, it managed to score five points, so the stock has fallen off the pace somewhat since then. Falling returns on equity are the culprit, but the company has still seen spectacular sales growth.

Green Mountain is a great example of how stocks can keep soaring even when many people are convinced that they're overpriced. Despite a sky-high earnings multiple and skepticism from many quarters about its future prospects, Green Mountain has been one of the best performing stocks of 2011.

The company owes its success to its popular Keurig single-cup coffee machine, which has been driving sales higher. During its most recent quarter, the company saw sales double and profits nearly triple as customers have to buy high-margin K-cups for their machines. The company expects sales to double for its fourth quarter as well and pushed up earnings guidance. With coffee giant Starbucks (Nasdaq: SBUX  ) joining competitors like Caribou Coffee (Nasdaq: CBOU  ) to provide K-cups, Green Mountain's machine has hit the big time.

That doesn't mean that it's all clear sailing for Green Mountain. With newly public Dunkin' Brands (Nasdaq: DNKN  ) competing strongly, the coffeehouse business is still cutthroat. And with the company relying in part on retail space at sellers such as Sears (Nasdaq: SHLD  ) and Safeway (NYSE: SWY  ) for K-Cup sales, Green Mountain is vulnerable to the changing whims of shoppers.

For now, though, Green Mountain is running full-throttle and taking advantage of the coffee craze while it lasts. It may never become a perfect stock, but Green Mountain is making all the right moves during its boom times.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and Green Mountain Coffee Roasters, as well as creating a lurking gator position in Green Mountain Coffee Roasters. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (3)

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, 2011, at 2:13 PM, kidchicago2 wrote:

    Are perfect stocks usually the subject of multi-year SEC investigations regarding accounting irregularities? If so, GMCR might be perfect indeed.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1568313, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:35:11 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement