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 Pier 1 Imports (NYS: PIR) 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 Pier 1 Imports.
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%
5 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, Pier 1 Imports falls pretty much halfway in its quest toward perfection. The retailer has had a wild ride in recent years, but strong results bode well for the company's future.
Pier 1 has had a storied history. After a rough patch in 2004, reports that Warren Buffett was buying shares of the stock had some value investors excited about the company.
Yet by 2009, most investors had left Pier 1 for dead. The retailer of imported home furnishings saw its shares trade as low as $0.10 as the company went through five years of declining sales. Yet what followed was a dramatic turnaround story, as the company rebounded to face off against not only direct competitor Cost Plus (NAS: CPWM) but also more general home-furnishings retailers like Bed Bath & Beyond (NAS: BBBY) and high-end Williams-Sonoma (NYS: WSM) .
More recently, the company has put forth a plan to rebuild its future. With a planned $200 million investment in the business and a $100 million share repurchase program, Pier 1's three-year growth road map seems to be getting off on the right foot.
On Thursday, Pier 1 released earnings for the second quarter. With same-store sales rising 10.8%, the retailer managed to post sales and earnings that topped analyst expectations. Although the company has had to shift its focus toward smaller items to respond to the slow economy, the positive quarter shows that Pier 1 can make strategic moves to adapt to bad conditions rather than stubbornly losing money waiting for the economy to turn.
Pier 1 is at a crossroads now. With its turnaround firmly in place, it now has to deliver on its promises. If it can continue its winning ways, then Pier 1 could be the rare stock that goes from zero to hero.
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 contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Bed Bath & Beyond. 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.
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