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 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 a 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%

26.7%

Pass

 

1-year revenue growth > 12%

45.5%

Pass

Margins

Gross margin > 35%

55.1%

Pass

 

Net margin > 15%

10.7%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

2.36

Pass

Opportunities

Return on equity > 15%

17.6%

Pass

Valuation

Normalized P/E < 20

31.94

Fail

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 SodaStream last year, the company has held onto its six-point score. The stock has also stayed reasonably fizzy, gaining about 25% over the past year.

With its home carbonator systems, SodaStream has done an excellent job of bucking the trend of relatively weak results for more established traditional soft-drink makers. Both Coca-Cola and PepsiCo have seen their sales growth fall to low single-digit percentages over the past year, as particular weakness in North America continues to water down growth opportunities elsewhere across the globe.

Key to its growth in 2012 has been SodaStream's ability to line up retail partners. Wal-Mart added itself to SodaStream's list earlier this year, opening up a whole new market for its carbonators, and helping to improve its distribution of syrups and other accessories.

SodaStream recently decided to take a big gamble in its push for growth, announcing plans to buy a Super Bowl ad spot. A 30-second spot could cost the company $4 million, but it will fit well with SodaStream's global reach, given the worldwide popularity of the game.

Despite constant comparisons to Green Mountain Coffee Roasters , it's important to draw distinctions. With K-Cups going off-patent, Green Mountain has to constantly innovate, whereas it's much harder to go to generic alternatives to SodaStream's carbonators.

For SodaStream to improve, it needs to demonstrate its ability to sell not just initial carbonation systems, but also the consumables that drive higher margins. Therefore, 2013 should be an interesting year for SodaStream, as it tries to make its growth story fizz even higher.

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.

This quick take only scratches the surface of SodaStream's opportunity. Get the whole story on whether SodaStream is a huge buy opportunity in our new research report on the company, which gives you in-depth analysis of SodaStream's opportunities and risks. The report comes with a year's worth of updates, so just click here to get started.

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

The article Has SodaStream Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Green Mountain Coffee Roasters, PepsiCo, and SodaStream. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Coca-Cola, PepsiCo, and SodaStream. Try any of our Foolish newsletter services free for 30 days. 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 Motley 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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