Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Red Robin Gourmet Burgers
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many areas, which come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.8%||fail|
|1-Year Revenue Growth > 12%||(0.4%)||fail|
|Margins||Gross Margin > 35%||19.4%||fail|
|Net Margin > 15%||0.8%||fail|
|Balance Sheet||Debt to Equity <50%||54.3%||fail|
|Current Ratio > 1.3||0.53||fail|
|Opportunities||Return on Equity > 15%||2.3%||fail|
|Valuation||Normalized P/E < 20||57.48||fail|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||0 out of 10|
Source: Capital IQ, a division of Standard and Poor's.Total score = number of passes.
As far as my taste buds are concerned, Red Robin was a perfect eatery for a long time, so it's surprising to discover the stock posting the first goose egg since I started looking for the perfect stock three months ago. But given some of the company's recent troubles, it's not surprising to see the burger maven cooking up a low score.
It's no secret that the restaurant business is difficult. Look at competitors like Darden's
But Red Robin has had its own particular trials. Management decided to try to grow at any price, and it backfired on the company. Shares lost two-thirds of their value from their 2005 all-time high. But recently, activist investors have stepped in to force change, and Red Robin has responded favorably. Yet with the shares languishing, some believe the burger maker is a potential takeover target at current prices.
Red Robin has been far from perfect, but that doesn't mean it's automatically a terrible investment now. If you believe in a potential turnaround story, Red Robin might get a lot closer to perfect in the future.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Chipotle Mexican Grill, which is a Motley Fool Rule Breakers recommendation and 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.