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 PetMed Express
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 PetMed Express.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||11.0%||Fail|
|1-Year Revenue Growth > 12%||(2.8%)||Fail|
|Margins||Gross Margin > 35%||36.2%||Pass|
|Net Margin > 15%||9.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||10.00||Pass|
|Opportunities||Return on Equity > 15%||21.5%||Pass|
|Valuation||Normalized P/E < 20||14.08||Pass|
|Dividends||Current Yield > 2%||3.9%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; PetMed started paying a dividend in 2009. Total score = number of passes.
With a score of 6, PetMed Express puts up a good showing. The mail-order veterinary medicine company has tapped into America's love affair with pets and their desire for quick, convenient delivery of the things they need.
PetMed's goal is very simple: to become for pet medicines what Amazon.com
That said, PetMed doesn't have a huge share of that market right now, at only about 6%. And even worse, revenue growth has slowed considerably, even reaching a slight drop over the past year. Analysts have noticed the problem, and shareholders are feeling the pinch.
Until the company manages to return to a growth trajectory, PetMed isn't going to become shareholders' best friend. But just as Walgreen's
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of PetMed Express and Wal-Mart. Motley Fool newsletter services have recommended Wal-Mart, PetSmart, and Amazon.com, as well as creating a diagonal call position in Wal-Mart. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.