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 (NAS: 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%||16.4%||Pass|
|1-Year Revenue Growth > 12%||31.5%||Pass|
|Margins||Gross Margin > 35%||91%||Pass|
|Net Margin > 15%||2.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||1.96||Pass|
|Opportunities||Return on Equity > 15%||8.2%||Fail|
|Valuation||Normalized P/E < 20||17.10||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Travelzoo last year, the company has kept the same score. The stock, though, has suffered big losses as many deal-related social-media stocks have come under pressure.
Until last year, Travelzoo was flying high. Its travel-deal service seemed almost prescient in jumping on the increasingly popular bandwagon of offering discounted goods and services through the Internet. With the company joining OpenTable (NAS: OPEN) in adopting daily deals similar to those of Groupon (NAS: GRPN) , Travelzoo investors got excited about its prospects.
But then, Travelzoo hit some turbulence. Groupon's business model came under fire, which led to Travelzoo and OpenTable having their shares crushed. Moreover, Travelzoo's subscriber growth slowed in the middle of the year, with the company missing revenue and income estimates.
Looking forward, Travelzoo needs to figure out what it wants to be when it grows up. As a regular travel portal, it likely can't compete with the huge success of priceline.com (NAS: PCLN) , which is dominating its closest competitors. At the same time, if Travelzoo does focus on local deals, then it needs to counter moves like Groupon's pairing up with Expedia (NAS: EXPE) on its Groupon Getaways travel deal service.
The good news is that with the shares much cheaper than they were this time last year, Travelzoo has plenty of upside potential. But it will have to execute well to realize that potential and start climbing upward toward perfection.
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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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of OpenTable, Travelzoo, and priceline.com. 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.
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