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 priceline.com (Nasdaq: PCLN ) 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 priceline.com.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||30.8%||Pass|
|1-Year Revenue Growth > 12%||38.5%||Pass|
|Margins||Gross Margin > 35%||72.4%||Pass|
|Net Margin > 15%||24.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||51.9%||Fail|
|Current Ratio > 1.3||3.26||Pass|
|Opportunities||Return on Equity > 15%||49.9%||Pass|
|Valuation||Normalized P/E < 20||35.32||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at priceline.com last year, the company has dropped a point, as debt-to-equity crept up. However, shareholders can't really complain about the stock's 20% gain over the past year.
For years, Priceline has been the king of the travel-portal industry. Between its goofy William Shatner commercials and its innovative name-your-own-price feature, the company has maintained a competitive advantage over rivals Expedia (Nasdaq: EXPE ) and Orbitz (NYSE: OWW ) , even though Expedia has also gotten itself out of the doldrums recently.
Part of what has set Priceline apart is its international exposure. Having bought Europe's Booking.com and the Asian hotel booking service Agoda over the past decade, Priceline has used its overseas business to boost its growth rates.
But looking forward, as Priceline starts to saturate international markets and run into competition from overseas providers Ctrip.com (Nasdaq: CTRP ) and MakeMyTrip, it will need some other growth opportunities. After its PriceBreakers deal service failed to match the success of Travelzoo (Nasdaq: TZOO ) , some analysts believe that a Priceline buyout bid for Travelzoo might make sense.
To improve, Priceline needs to avoid the temptation to finance too much growth through debt financing. Beyond that, until the company's growth phase slows down enough to justify a dividend, Priceline is probably about as close to perfection as it's likely to get for the foreseeable future.
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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