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 Red Robin Gourmet Burgers (Nasdaq: RRGB ) 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 Red Robin Gourmet Burgers.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.5%||Fail|
|1-Year Revenue Growth > 12%||5.6%||Fail|
|Margins||Gross Margin > 35%||20.6%||Fail|
|Net Margin > 15%||2.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||53.9%||Fail|
|Current Ratio > 1.3||0.67||Fail|
|Opportunities||Return on Equity > 15%||6.7%||Fail|
|Valuation||Normalized P/E < 20||26.68||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||0 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Red Robin Gourmet Burgers last year, the company has stayed in the cellar on our 10-point scale. But ask investors about the 40%+ gains they've seen in their shares, and you'll get opinions that put Red Robin a lot closer to perfection.
For a long time, Red Robin was the odd restaurant out in the industry. Among casual eateries, Buffalo Wild Wings (Nasdaq: BWLD ) led the way in terms of earnings growth with annual jumps of more than 30% over the past five years. Texas Roadhouse (Nasdaq: TXRH ) also put up impressive numbers with about 15% growth. But Red Robin actually saw earnings decline by double-digit percentages over the past five years.
That lack of growth prompted activist investors to take notice. Although restaurant-focused Biglari Holdings (NYSE: BH ) only held its investment in Red Robin briefly, other major shareholders started pushing for change early last year. Although the stock fell sharply during the stock market's summer swoon, it has rebounded nicely. Yet the company's earnings multiple has fallen dramatically since this time last year.
Still, Red Robin faces the same challenges as other restaurants, such as price inflation. McDonald's (NYSE: MCD ) has suffered from higher beef, cheese, and other food prices. But Red Robin has tried to stay ahead of that trend, passing through a modest price increase in 2011 for the first time in three years to try to keep margins up.
For Red Robin to achieve perfection, it needs to get its debt down, its margins up, and its popularity among customers back to previous levels. If it can deliver on those promises, Red Robin won't have a goose egg for a score much longer.
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 Red Robin Gourmet Burgers 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."