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 Barnes & Noble
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 Barnes & Noble.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.8%||Fail|
|1-Year Revenue Growth > 12%||1.9%||Fail|
|Margins||Gross Margin > 35%||26.8%||Fail|
|Net Margin > 15%||(1%)||Fail|
|Balance Sheet||Debt to Equity < 50%||50.5%||Fail|
|Current Ratio > 1.3||1.09||Fail|
|Opportunities||Return on Equity > 15%||(7.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||0 out of 9|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Barnes & Noble last year, the company has lost its last point. With that as context, the book retailer's roughly 15% drop in share price over the past year doesn't seem all that bad.
Barnes & Noble is the last player standing in the war between online and bricks-and-mortar bookstores. With Amazon.com
But B&N has continued to fight, turning to its Nook e-reader and tablet for a life preserver. A few months ago, the company got some help from Microsoft
Moreover, as Microsoft's partnership with Nokia
Barnes & Noble is going to have a tough time improving under any circumstances. At this point, the best-case scenario for the company seems to be getting a buyer to see the potential value of the Nook as a gateway to a more extensive mobile product. Unless that happens, Barnes & Noble isn't likely to see perfection in the near future.
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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