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 OpenTable (Nasdaq: OPEN ) 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 OpenTable.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||33.4%||Pass|
|1-Year Revenue Growth > 12%||22.0%||Pass|
|Margins||Gross Margin > 35%||72.7%||Pass|
|Net Margin > 15%||14.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.82||Pass|
|Opportunities||Return on Equity > 15%||16.6%||Pass|
|Valuation||Normalized P/E < 20||48.94||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. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at OpenTable last year, the company has lost a point. Falling net margins were responsible for the drop, but a greater-than-25% decline for the stock has investors much more concerned about the future.
OpenTable draws strong opinions from investors on both sides of the spectrum. The company is one of the most heavily shorted Internet-related stocks in the market, as bears point to the recent experience of daily deals vendor Groupon (Nasdaq: GRPN ) and see OpenTable as having no more of a moat than Groupon does. With competition from CityEats, the Food Network-based reservation service from Scripps Network Interactive (NYSE: SNI ) , OpenTable needs to defend its turf. Yet future competition from Yelp (NYSE: YELP ) could prove even more difficult to overcome.
More worrisome has been the fallout from the failure of the Facebook (Nasdaq: FB ) IPO. Facebook's plunge hasn't just destroyed confidence in the process of going public; it's also called the entire social-media monetization theory into question. Unlike some social-media companies, OpenTable is at least profitable, but with a rich valuation despite a big plunge from its highs, as well as questionable growth prospects, it hasn't escaped scrutiny.
Recently, though, OpenTable seems optimistic about its future. For the second quarter, the company saw 15% higher revenue and a 27% boost in adjusted profit, as total diners jumped by 27% and OpenTable's software-installed restaurant count rose by 11%. OpenTable also boosted its earnings guidance for the full year.
For OpenTable to keep improving, it needs to produce results that confound the skeptics. If it can succeed, then OpenTable's stock could soar when short-sellers have to throw in the towel. Until then, though, OpenTable will have something to prove.
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.
OpenTable shares some of the same challenges that Facebook has. Despite many skeptical investors, the bullish case for Facebook is still compelling. Grab a copy of the Fool's premium report on Facebook, where top Fool tech analysts break down Facebook's monetization throughout the world and look at what it would take to consider Facebook a buy.
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