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) 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) and the move toward pastries and other baked goods that Starbucks (SBUX 1.00%) 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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