Is Collective Brands 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 Collective Brands (NYS: PSS) 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 Collective Brands.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%4.7%Fail
 1-Year Revenue Growth > 12%2.3%Fail
MarginsGross Margin > 35%30.9%Fail
 Net Margin > 15%(3.9%)Fail
Balance SheetDebt to Equity < 50%84%Fail
 Current Ratio > 1.32.32Pass
OpportunitiesReturn on Equity > 15%(15.3%)Fail
ValuationNormalized P/E < 20NMNM
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 1 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

With only a single point, Collective Brands has its foot in its mouth right now. The company should appeal to its bargain-seeking customer base, but recent results leave a lot to be desired.

Collective Brands is the company behind Payless Shoe Source and Stride Rite shoe stores. But the company also has several well-known shoe brands like Keds. Another example is Saucony, which is an athletic shoe that goes up against products from established leader Nike (NYS: NKE) , up-and-coming footwear seller Under Armour (NYS: UA) , and other sports-oriented shoe companies.

With the company expanding internationally, it has potential for growth. But so far, sales have been relatively flat, and Collective Brands has been losing money. In its latest quarter, in fact, the company reported a loss of $1.91 per share, far worse than the $0.50 loss that analysts had expected. However, that loss was entirely due to restructuring and strategic review costs -- items that could help get Collective Brands into a better position in the future.

The main problem for Collective Brands is that the shoe business is highly competitive. From SKECHERS (NYS: SKX) to Crocs (NAS: CROX) , Deckers Outdoor (NAS: DECK) to recently acquired Timberland, everyone's fighting to become or stay fashionable. Until the economy rebounds far enough to raise all ships, Collective Brands doesn't look poised to reach perfection anytime soon.

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 Collective Brands 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 our "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour, Deckers Outdoor, and Nike, as well as creating a diagonal call position in Nike and a bear put spread position in Deckers Outdoor. 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.

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

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