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 Expedia (NAS: EXPE) 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 Expedia.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.0%||Fail|
|1-Year Revenue Growth > 12%||16.2%||Pass|
|Margins||Gross Margin > 35%||77.8%||Pass|
|Net Margin > 15%||11.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||58.0%||Fail|
|Current Ratio > 1.3||0.86||Fail|
|Opportunities||Return on Equity > 15%||13.9%||Fail|
|Valuation||Normalized P/E < 20||23.58||Fail|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||2 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Expedia started paying a dividend in May 2010. Total score = number of passes.
Since we looked at Expedia last year, the company has lost a point. A decline in return on equity is to blame for the score drop, but shareholders aren't complaining about the roughly 50% jump the stock has seen in the past year.
The travel-portal industry continues to be extremely competitive, with priceline.com (NAS: PCLN) and Orbitz (NYS: OWW) vying with Expedia for supremacy in the space. In terms of growth, Priceline is still outpacing its competition, but Expedia's valuations are more attractive even after the recent run-up in the stock price.
What's arguably most surprising about Expedia's performance is that it has soared alongside TripAdvisor (NAS: TRIP) , which it spun off late last year. Many predicted that TripAdvisor would be the faster grower and overtake Expedia, but the former parent company's core business has also accelerated. Meanwhile, many social-media-related stocks have suffered, with travel-deal purveyor Travelzoo (NAS: TZOO) having lost more than three-quarters of its value and struggling for future direction.
But, at least for now, it seems like there's room enough for multiple winners in the travel-portal space. Expedia has done a good job of helping displace traditional travel agents, and so a bigger slice of the overall travel pie means more revenue for both Expedia and its peers.
For Expedia to improve, though, it needs to translate that growth potential into tangible results. Improving internal efficiency and getting its balance sheet minimally cleaned up would do wonders toward getting Expedia much closer to 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. The Motley Fool owns shares of priceline.com and TripAdvisor. Motley Fool newsletter services have recommended buying shares of priceline.com, TripAdvisor, and Travelzoo. 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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