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, and then decide if Green Mountain Coffee Roasters (GMCR.DL) 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 Green Mountain Coffee Roasters.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

62.9%

Pass
 

One-year revenue growth > 12%

56.8%

Pass

Margins

Gross margin > 35%

33.3%

Fail
 

Net margin > 15%

9.5%

Fail

Balance sheet

Debt to equity < 50%

18.8%

Pass
 

Current ratio > 1.3

2.46

Pass

Opportunities

Return on equity > 15%

17.1%

Pass

Valuation

Normalized P/E < 20

11.36

Pass

Dividends

Current yield > 2%

0%

Fail
 

Five-year dividend growth > 10%

0%

Fail
       
 

Total Score

  

6 out of 10

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

Since we looked at Green Mountain Coffee Roasters last year, the company has more than recovered from its score drop from 2010 to 2011 as it picked up two points. The stock, though, hasn't been so lucky, having lost fully three-quarters of its value over the past year.

Green Mountain has been one of the biggest success stories in retail in the past several years. The explosion of interest in its Keurig single-serve coffee machines has created a brand-new outlet for the industry, almost single-handedly supporting small companies Coffee Holding (JVA -0.60%) and Caribou Coffee (NASDAQ: CBOU) by providing a distribution mechanism in the form of its K-Cups.

But Green Mountain has faced attacks on multiple fronts. With its K-Cup patents expiring, competitors will no longer have to arrange lucrative licensing deals; SUPERVALU (SVU) is among the many grocers set to release an in-house line of K-Cups. Despite its attempts to market a new patented brewer called the Vue, Green Mountain will have trouble luring existing customers to buy yet another machine. Moreover, with the new Verismo machine from Starbucks (SBUX 0.47%) coming to market, Green Mountain faces a big challenge to retain status-conscious customers.

Green Mountain isn't going down without a fight, though. With a promotional mail-order rebate, the company is encouraging sales of its brewers. Almost like a pharmaceutical company after its blockbuster drug goes off patent, Green Mountain is trying to compete on price in order to retain market share and brand loyalty.

For Green Mountain to improve, it needs to defend its impressive growth rates and sustain margins to the best of its ability. With the stock trading at such cheap levels, there's a lot of potential profit if the company can get past its challenges and find new ways to thrive in the much-changed coffee market.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

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