Has Red Robin Gourmet Burgers 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, then decide if Red Robin Gourmet Burgers (RRGB 1.59%) 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 Red Robin Gourmet Burgers.

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

Since we looked at Red Robin Gourmet Burgers last year, the company has finally gotten into the plus column, pulling its debt-to-equity ratio under the 50% mark. Yet the stock has done a lot better than a low one-point score would suggest, with shares up 15% over the past year.

Much of Red Robin's stock appreciation has come from efforts by activist investors to do a complete turnaround of the company. In contrast to Cracker Barrel (CBRL -2.26%), where Biglari Holdings' (BH 2.73%) Sardar Biglari has had to fight hard in an attempt to replace management and implement improvements, Red Robin largely gave in to the activists that sought change in its internal workings. The result has been a better than 50% gain for the shares since late 2011.

One key area where Red Robin has worked hard is to improve margins. With Chipotle Mexican Grill (CMG 2.41%) having recently reported a big increase in food costs that sent shares plunging, keeping costs down is a key element of staying profitable throughout the restaurant industry.

Still, not everyone is sure that Red Robin has further to go. Early last year, Fool analyst Jim Royal gave up on the stock, arguing that slowing growth and higher tax expenses meant that the company had already seen most of the gains it would experience. Given that shares are down from their February-March 2012 levels, that call seems prescient.

For Red Robin to improve, it needs to work on boosting margins further, and finding new avenues for growth. Regardless, though, it'll take a lot of effort to get Red Robin much closer to 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.

Click here to add Red Robin Gourmet Burgers to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.