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Has Starwood Hotels Become the Perfect Stock?

Dan Caplinger
January 25, 2012

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 Starwood Hotels (NYSE: HOT  ) 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 Starwood Hotels.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (1.7%) Fail
  1-Year Revenue Growth > 12% 9.2% Fail
Margins Gross Margin > 35% 23% Fail
  Net Margin > 15% 12.2% Fail
Balance Sheet Debt to Equity < 50% 110.7% Fail
  Current Ratio > 1.3 1.08 Fail
Opportunities Return on Equity > 15% 22.1% Pass
Valuation Normalized P/E < 20 38.04 Fail
Dividends Current Yield > 2% 0.9% Fail
  5-Year Dividend Growth > 10% (27.2%) Fail
  Total Score   1 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Starwood Hotels last year, the hotelier has actually gotten itself out of the basement by picking up a point. Yet even with a big boost in returns on equity, the company has a long way to go to reach perfection.

Starwood hasn't seen great stock performance in the past year, although it dug itself out of an even deeper hole from the summer. With the Commerce Department's tourism office expecting an influx of international tourism over the next five years, especially from U.S. neighbors Canada and Mexico, as well as emerging-market nations Brazil and China, Starwood is in position to benefit greatly.

One potentially catastrophic error, however, may be Starwood's failure to get into the new joint venture. The online booking site, which includes rivals Marriott (