Has Shutterfly Become 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 Shutterfly (NASDAQ: SFLY  ) 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 Shutterfly.

Factor	What We Want to See	Actual	Pass or Fail?
Growth	5-year annual revenue growth > 15%	29%	Pass
�	1-year revenue growth > 12%	47.1%	Pass
Margins	Gross margin > 35%	52.2%	Pass
�	Net margin > 15%	1%	Fail
Balance sheet	Debt to equity < 50%	0%	Pass
�	Current ratio > 1.3	2.42	Pass
Opportunities	Return on equity > 15%	0.9%	Fail
Valuation	Normalized P/E < 20	135.17	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 Shutterfly last year, the company has kept its five-point score. Despite turning profitable, it hasn't had much luck with its stock price, which is down about 5% over the past year.

Shutterfly is one of many online-oriented companies that allow people to share photos and created customized holiday cards and photo albums. With photography having moved primarily to digital formats, Shutterfly has done a good job establishing its niche in the industry.

Clearly, the barrier to entry for online photo services is pretty low, and Shutterfly faces competition from major retailers Wal-Mart (NYSE: WMT  ) and Costco (NASDAQ: COST  ) . Earlier this year, though, Shutterfly's fire-sale purchase of bankrupt Eastman Kodak's Kodak Gallery online business helped boost Shutterfly's growth back in the right direction, adding customers from a well-established brand to its fold.

Yet the Kodak Gallery purchase hasn't gone perfectly smoothly. Reviews from Kodak customers indicate that they've had trouble logging into Shutterfly, editing album names, or uploading photos. Although Hewlett-Packard's (NYSE: HPQ  ) Snapfish has had some similar troubles, Facebook's� (NASDAQ: FB  ) Instagram has gotten better reception from customers trying to upload mobile photos.

To improve, Shutterfly clearly needs to address customer concerns and work on better integrating its Kodak acquisition. With the holiday season being Shutterfly's most important time of year, any attempt to reach perfection will need the company's best efforts right now.

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.

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