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 Krispy Kreme
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 Krispy Kreme.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (6%) | Fail |
| 1-Year Revenue Growth > 12% | 8.5% | Fail | |
| Margins | Gross Margin > 35% | 13.7% | Fail |
| Net Margin > 15% | 3.3% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 40.3% | Pass |
| Current Ratio > 1.3 | 1.80 | Pass | |
| Opportunities | Return on Equity > 15% | 15.8% | Pass |
| Valuation | Normalized P/E < 20 | 53.22 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just three points, Krispy Kreme isn't serving up perfection. But the company may finally be getting itself out of the doughnut hole it dug for itself.
Krispy Kreme was one of the hottest franchises of the early 2000s. But although some drew parallels between Krispy Kreme and Starbucks
In the interim, competition has arisen. Tim Hortons
Some still hold out hope for Krispy Kreme. This week, the company reported its strongest quarterly profit in seven years. But even if the company can get back some of its momentum from years past, the industry has moved on. Now, doughnuts are a sideline to the coffee wars that Dunkin', McDonald's
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 Krispy Kreme 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.
