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 Urban Outfitters (NAS: URBN) 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 Urban Outfitters.
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.
Urban Outfitters posts an impressive score of 6. The retailer has faced a tough environment in recent years, and it's unclear whether things have really started to turn around yet for the company.
At first glance, Urban Outfitters may seem like just another retail play. But the company stands out from competitors like American Eagle Outfitters (NYS: AEO) and Pacific Sunwear (NAS: PSUN) in two main ways: It doesn't oversaturate its markets and it has a wide spectrum of target demographics.
That hasn't protected the company from the ups and downs of retail. But for years, Urban Outfitters has found ways out of difficult situations that have left its competitors in the dust. For instance, back in 2006, the company found itself in the "out" pile, but it executed a strong turnaround even in the depths of the early part of the last economic recession. That's more than Talbots (NYS: TLB) , Gap (NYS: GPS) , or Abercrombie & Fitch (NYS: ANF) can say about their much longer struggles to regain their past retail glory.
The question, though, is whether things are different this time for the company. Earlier this week, Urban Outfitters had a very mixed quarterly report. Although revenue jumped 10% to a record, earnings fell as same-store sales came in down 2%. Inventory soared while the company's cost of sales jumped much faster than total revenue.
With a squeaky clean balance sheet and excellent margins for the retail business, Urban Outfitters has something to offer discriminating investors. It's not a perfect stock, but with some help, Urban Outfitters might well become one at some point in the future.
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 Gap. 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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