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 Travelzoo (Nasdaq: TZOO) 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 Travelzoo.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 17.3% Pass
  1-Year Revenue Growth > 12% 20.0% Pass
Margins Gross Margin > 35% 93.6% Pass
  Net Margin > 15% 11.7% Fail
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 3.17 Pass
Opportunities Return on Equity > 15% 34.3% Pass
Valuation Normalized P/E < 20 53.65 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Travelzoo scores an above-average 6. The online travel dealmaker may not be best in class, but it has some promising things going on.

Travelzoo tapped into the power of social media long before anyone recognized its potential. The company's specialty is sending regular email messages with great travel deals. The company has 18.9 million subscribers to its weekly missive and is looking for that figure to grow, in part through expansion in Europe.

Like Groupon for all-purpose deals and OpenTable (Nasdaq: OPEN) for restaurants, Travelzoo may not seem to have a very wide moat for its business. But surprisingly, competitors have had trouble breaking in on Travelzoo's turf. Both priceline.com (Nasdaq: PCLN) and Expedia's (Nasdaq: EXPE) Hotwire have tried offering similar deals to their customers, but with limited success.

Travelzoo's least attractive feature is its valuation, which tops both priceline and Chinese competitor Ctrip.com (Nasdaq: CTRP). But if Travelzoo can tap into greater social media profits, then it may deserve the crazy valuations we've seen on Facebook, Twitter, and other sites that have a much shorter history.

Travelzoo hasn't yet reached its full potential. But its flight plan is aiming higher, and the travel specialist might well get closer to perfection if the social-media revolution continues.

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 Travelzoo to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. OpenTable is a Motley Fool Rule Breakers pick. priceline.com is a Motley Fool Stock Advisor recommendation. Ctrip.com International is a Motley Fool Hidden Gems choice. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.