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 Polo Ralph Lauren (NYS: RL) 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 Polo Ralph Lauren.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
6 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Polo Ralph Lauren looks pretty stylish with its score of six. The upscale retailer has done better than some of its more midrange peers recently, and prospects look good as it seeks growth beyond the slow economy of its U.S. home market.
Retail has been a tale of two markets. On one hand, deep discounters like Family Dollar (NYS: FDO) have grabbed the low end of the retail spectrum, even challenging retail giant Wal-Mart (NYS: WMT) . At the same time, though, luxury retailers have held up far better than those caught in the middle, as the truly wealthy haven't seen as big a hit from the recession as their middle-class counterparts.
The key to success for luxury retailers has been Asia. In the past three years, Polo has built a presence in China, Japan, South Korea, and several other Southeast Asian countries. Just as Coach (NYS: COH) and Tiffany (NYS: TIF) have targeted Asia as a particular source of potential growth, so too is Polo seeing great results, with rising sales of more than 40% in the region being the company's fastest-growing geographic segment.
That emphasis on foreign markets will only become more important if the U.S. slips back into recession. Fellow Fool Alyce Lomax argues that given Coach's most recent results, which were somewhat disappointing, fellow retailers like Williams-Sonoma (NYS: WSM) and Nordstrom (NYS: JWN) could be next. Eventually, though, the economy truly will recover, and that may be Polo Ralph Lauren's big chance to reach 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 thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Wal-Mart and Coach.Motley Fool newsletter serviceshave recommended buying shares of Coach and Wal-Mart, as well as creating a diagonal call position on Wal-Mart. 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.
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