Has Einstein Noah Become the Perfect Stock?

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 whether Einstein Noah (NASDAQ: BAGL) 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.
• Moneymaking 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 Einstein Noah.

Source: S&P Capital IQ. NM = not meaningful; Einstein Noah started paying a dividend in February 2011. Total score = number of passes.

Since we looked at Einstein Noah last year, the company has picked up a point, with better returns on equity. The stock, though, has just barely managed to eke out a small gain over the past year.

Einstein Noah has a simple mission: It makes bagels under the Einstein Bros. and Noah's brand names, among others. With nearly 800 stores scattered across the country, Einstein Noah has a nationwide presence.

But the restaurant industry has gotten increasingly competitive in recent years. Even within the bread niche, Panera Bread (PNRA +0.00%) dwarfs Einstein Noah with nearly twice as many locations and a much bigger market cap, as its growth figures have been quite a bit more impressive. Moreover, with the public offering of Dunkin' Brands (DNKN +0.00%) and the move toward pastries and other baked goods that Starbucks (SBUX 0.01%) has made in the past few years, Einstein Noah has a lot of other players gunning for customers' appetites.

Earlier this year, Einstein Noah moved higher on speculation that it was exploring strategic alternatives, which could have included a sale of the company. Yet last month, the company warned that its third-quarter earnings would fall below estimates and said it might have to restructure its debt. Although a special dividend may be coming, that seems inconsistent with its fairly high debt-to-equity ratio.

For Einstein Noah to improve, it needs to work on expansion plans to try to drive revenue higher. Without that, seeking a buyer may be the best chance Einstein Noah has to reach perfection.

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.

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