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 Buffalo Wild Wings (Nasdaq: BWLD ) 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 Buffalo Wild Wings.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||23.6%||Pass|
|1-Year Revenue Growth > 12%||14.9%||Pass|
|Margins||Gross Margin > 35%||26.9%||Fail|
|Net Margin > 15%||6.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||1.71||Pass|
|Opportunities||Return on Equity > 15%||17.3%||Pass|
|Valuation||Normalized P/E < 20||25.42||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Buffalo Wild Wings serves up a mildly spicy score of 5. The restaurant purveyor has had to deal with a challenging industry environment, but it has some things going for it that have hurt most other food companies.
Across the industry, companies that deal in food have seen an alarming trend: higher prices for raw ingredients they need to prepare meals for customers. Whether it's high-end companies like Ruth's Hospitality (Nasdaq: RUTH ) or low-cost McDonald's (NYSE: MCD ) , restaurants that offer beef have seen higher prices. Similarly, pizza companies Domino's (NYSE: DPZ ) and Papa John's (Nasdaq: PZZA ) have faced high costs for cheese.
But Buffalo Wild Wings has an interesting dynamic in that regard. It relies mostly on chicken, whose prices have fallen recently. And despite the company's fairly high multiple, it also has higher growth rate estimates than peers like Ruby Tuesday (NYSE: RT ) and California Pizza Kitchen (Nasdaq: CPKI ) .
At some point, the economy has to turn stronger, and when it does, consumers will start eating out again. In turn, Buffalo Wild Wings should be in a strong position to capitalize when that happens. Even with the specter of the NFL lockout potentially reducing demand, Buffalo Wild Wings has shown in the past just how well it can do even in tough environments.
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.