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 Panera Bread (NAS: PNRA) 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 Panera Bread.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 17.1% Pass
  1-Year Revenue Growth > 12% 18.1% Pass
Margins Gross Margin > 35% 34.9% Fail
  Net Margin > 15% 7.5% Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 1.48 Pass
Opportunities Return on Equity > 15% 21.7% Pass
Valuation Normalized P/E < 20 35.08 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

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

Since we looked at Panera Bread last year, the stock has kept its five-point score. From a numbers standpoint, just about everything about Panera has stayed almost the same, except that the stock has rocketed upward in price.

Panera has consistently surprised many investors with its ability to continue trading higher even at already-rich earnings multiples. Even as higher commodity costs hurt some restaurants, Panera was able to follow the Starbucks (NAS: SBUX) model of passing on those costs to customers through higher prices. Just as Starbucks has managed to keep its margins relatively healthy, so too has Panera done a good job of staying immensely profitable.

The key to Panera's success may simply be that it has managed to stay consistently popular by offering a unique experience. Chipotle (NYS: CMG) gives customers a high-quality Mexican-food experience that the company's now translating to Asian cuisine in another restaurant concept. Buffalo Wild Wings (NAS: BWLD) combines a sports-bar environment with a family friendly atmosphere. Panera is in the same class as Chipotle and Buffalo Wild Wings, turning up the volume on the tired bakery concept to make things interesting again.

Another of the company's secrets is its MyPanera loyalty program. With benefits including invitations to special events, the program goes beyond simply giving out free food.

As long as Panera stays in a high-growth phase, it isn't likely to get much closer to perfection. Only once it reaches critical mass should it start thinking about returning capital to investors through a dividend. At that point, it could be ready to make a march toward becoming a perfect stock.

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.

Panera Bread isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Panera Bread to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Buffalo Wild Wings, Starbucks, Chipotle, and Panera. Motley Fool newsletter services have recommended buying shares of Panera, Buffalo Wild Wings, Starbucks, and Chipotle, as well as creating a bear put spread position in Chipotle and writing covered calls on Buffalo Wild Wings and Starbucks. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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