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
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.
|
Factor |
What We Want to See |
Actual |
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
That lack of growth prompted activist investors to take notice. Although restaurant-focused Biglari Holdings
Still, Red Robin faces the same challenges as other restaurants, such as price inflation. McDonald's
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.
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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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 ."
