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 Coffee Holding (Nasdaq: JVA) 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 Coffee Holding.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 28% | Pass |
| 1-Year Revenue Growth > 12% | 52.7% | Pass | |
| Margins | Gross Margin > 35% | 5.1% | Fail |
| Net Margin > 15% | 0.5% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 5.8% | Pass |
| Current Ratio > 1.3 | 3.50 | Pass | |
| Opportunities | Return on Equity > 15% | 4.8% | Fail |
| Valuation | Normalized P/E < 20 | 52.83 | Fail |
| Dividends | Current Yield > 2% | 1.7% | Fail |
| 5-Year Dividend Growth > 10% | 0%* | Fail | |
| Total Score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes. *Since initiating a regular dividend in July 2010.
With four points, Coffee Holding could use a little pick-me-up. The stock has also gotten cold and bitter, with about a 20% drop in the past year.
Coffee Holding is benefiting from the current craze in the coffee industry. As a wholesale roasting company for both branded and private-label coffee, Coffee Holding does a huge amount of business with Green Mountain Coffee Roasters (Nasdaq: GMCR). That was a good thing when Green Mountain was on top of its game, but recently, it's raised some big uncertainties that have fallen through to Coffee Holding's bottom line.
But with Peet's Coffee & Tea (Nasdaq: PEET) having agreed to a billion-dollar buyout from a private equity firm in July, interest in the space has stayed extremely high. For small players like Coffee Holding and Caribou Coffee (Nasdaq: CBOU), the prospect of a buyout looms large, and it explains much of Coffee Holdings' high valuation based on trailing earnings.
The big question, though, is whether forward earnings estimates are accurate. The consensus calls for earnings of more than $1 per share in fiscal 2013, giving Coffee Holding a forward P/E of less than 7. With Starbucks (Nasdaq: SBUX) having introduced its Verismo single-serve coffee machine and Green Mountain facing rising inventory, that outlook may be overly optimistic.
For Coffee Holding to improve, it simply needs to keep on its growth trajectory and let rising earnings catch up with the stock. It's a long way from perfection, but Coffee Holding could give your portfolio a big jolt if things work out well.
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.
To understand Coffee Holding, you really need to know everything you can about Green Mountain. Get the latest in the Fool's premium report on Green Mountain Coffee Roasters. With a year's worth of free updates, you can't afford to miss it, so click here now and get your report today.
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