Is Sotheby's the Perfect Stock?

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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 Sotheby's (NYS: BID) 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 Sotheby's.

FactorWhat We Want to SeeActualPass or Fail?
Growth5-Year Annual Revenue Growth > 15%7.8%Fail
 1-Year Revenue Growth > 12%36.2%Pass
MarginsGross Margin > 35%59.4%Pass
 Net Margin > 15%23.5%Pass
Balance SheetDebt to Equity < 50%51.7%Fail
 Current Ratio > 1.31.60Pass
OpportunitiesReturn on Equity > 15%26.5%Pass
ValuationNormalized P/E < 2013.30 Pass
DividendsCurrent Yield > 2%0.6%Fail
 5-Year Dividend Growth > 10%(12.9%)Fail
    
 Total Score 6 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With six points, bidding on Sotheby's perfection could go higher. The auctioneer's prospects are tied to the overall economy, but with its upper-class clients following different financial rules from mainstream consumers, business has actually been very good lately.

Sotheby's is well known as one of the two preeminent auction houses in the world. Along with Christie's, Sotheby's is the place to go for high-priced art and other ultra-luxury items.

Anything depending on big-ticket sales may seem like exactly the wrong place to invest as threats of a double-dip recession resurface. But rich consumers have held up better during the downturn than their less wealthy counterparts. Just as we've seen luxury-oriented retailersCoach (NYS: COH) and Tiffany (NYS: TIF) post strong share-price increases at the same time that lower-end retailers like Target (NYS: TGT) and Sears Holdings (NAS: SHLD) have struggled, Sotheby's has maintained its reputation untarnished.

Earlier this month, Sotheby's recorded its best results in company history. Net income jumped 48% due to greater business at auctions and private sales. In particular, the company has made inroads within China, both in terms of attracting bidders and in acquiring auction listings from sellers as well. The jump reversed a troubling first quarter that featured lackluster art sales and weak profits due to higher expenses.

Sotheby's follows the whims of the upper-crust's desire to buy and sell the most expensive objects on the planet. That leaves it short of perfection, but if the rich continue to stay above the recessionary fray, then Sotheby's should benefit from their good fortune.

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.

Click hereto add Sotheby's to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Coach.Motley Fool newsletter serviceshave recommended buying shares of Coach and Sotheby's. 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 adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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