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 DineEquity
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 DineEquity.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 27.8% | Pass |
| 1-Year Revenue Growth > 12% | (13.2%) | Fail | |
| Margins | Gross Margin > 35% | 36.5% | Pass |
| Net Margin > 15% | (0.5%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 1462.1% | Fail |
| Current Ratio > 1.3 | 1.20 | Fail | |
| Opportunities | Return on Equity > 15% | (3.1%) | Fail |
| Valuation | Normalized P/E < 20 | 13.73 | Pass |
| Dividends | Current Yield > 2% | 0.0% | Fail |
| 5-Year Dividend Growth > 10% | 0.0% | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just three points, DineEquity isn't making its shareholders feel rooty, tooty, fresh, or fruity. The restaurant stock has a lot of obstacles to overcome in a very tough industry.
DineEquity combines two popular casual dining chains: Applebee's and IHOP. But casual dining has been a tough industry lately, as competitors like Brinker International
Unfortunately, what DineEquity has a lot of is debt. The $800 million market-cap company has almost $1.9 billion in debt on its balance sheet, whereas Buffalo Wild Wings
At least for now, DineEquity isn't getting that job done. In its most recent quarter, the company saw revenue decline and earnings fall below analysts' expectations. Although the company posted positive free cash flow for the past 12 months, it'll take a lot more to get DineEquity back on track for good.
DineEquity isn't perfect, and with its debt load, consistent losses, and no dividend, it's unlikely to get that way anytime soon. The company might be good for some yummy pancakes, but those seeking an appetizing investment should look elsewhere.
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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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.
