Is SodaStream 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 SodaStream (NAS: SODA) 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 SodaStream.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 26.3%* Pass
  1-Year Revenue Growth > 12% 45.4% Pass
Margins Gross Margin > 35% 53.6% Pass
  Net Margin > 15% 10.0% Fail
Balance Sheet Debt to Equity < 50% 0.1% Pass
  Current Ratio > 1.3 2.99 Pass
Opportunities Return on Equity > 15% 22.4% Pass
Valuation Normalized P/E < 20 27.84 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   6 out of 10

Source: S&P Capital IQ. *3.75-year growth rate. Total score = number of passes.

With six points, SodaStream is staying pretty fizzy for investors. The company recently ran into a big roadblock for its stock price, but it's still seeing some strong growth for its namesake soda maker.

SodaStream makes machines for carbonating water, which allows people to make seltzer and soft drinks at home. Like Green Mountain Coffee Roasters (NAS: GMCR) with its Keurig K-Cup coffeemaker, SodaStream has two separate revenue streams: one from selling the actual soda machine, and the other from selling consumables like carbon dioxide canisters and soda-flavor syrups.

In an attempt to grow, SodaStream has pulled out all the stops to increase sales. The company's been in retail stores like Bed Bath & Beyond (NAS: BBBY) and Williams-Sonoma (NYS: WSM) for some time. But even more promising are more recent efforts to sell SodaStream machines at Best Buy (NYS: BBY) , and Costco (NAS: COST) stores, which could be even bigger for the company. With Staples (NAS: SPLS) and Target also on board, the sky's the limit for SodaStream.

The big hiccup for the stock, though, came when SodaStream gave lousy guidance for its third quarter back in August. But by the time the actual numbers came, they were much better than expected, helping shares recover some though not nearly all of their losses.

A lot of SodaStream's future depends on how this holiday season goes. If the soda makers take off in popularity, then it could boost results not only now but also for years to come. If not, then the machines could become just another in a long line of fad products lining landfills.

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 the best investments from the rest.

Click here to add SodaStream 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 ."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Costco and Best Buy. Motley Fool newsletter services have recommended buying shares of Staples, Costco, Williams-Sonoma, SodaStream, Green Mountain Coffee Roasters, and Bed Bath & Beyond, as well as writing covered calls on Best Buy and creating a lurking gator position on Green Mountain Coffee Roasters. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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