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 bebe stores (NAS: BEBE) 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 bebe stores.
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%
3 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only three points, bebe stores isn't exactly dressing for success. The women's retailer has done its best to come back from past mistakes, but it's still facing a tough environment.
Times have rarely been tougher for retailers. On top of a lingering slow economy that defies a true recovery, companies like American Eagle Outfitters (NYS: AEO) , Aeropostale (NYS: ARO) , and Guess? (NYS: GES) have seen huge rises in what they have to pay for the raw materials that go into their clothes. That in turn forces retailers to compress their margins, hurting profits.
Meanwhile, bebe in particular faces a tough market for teen shoppers. Strong competition from Urban Outfitters (NAS: URBN) , Pacific Sunwear (NAS: PSUN) , and Abercrombie & Fitch (NYS: ANF) threatens every positive move that bebe makes.
But after some bad years, bebe has started pushing back toward the light. In its most recent quarter, bebe saw earnings more than double on 8% higher revenue and a 7% rise in same-store sales. But gross margins slipped due to higher costs for materials, and the company had to lower its outlook for the coming quarter as well.
With contracting revenue on a 12-month basis and negative net margins, bebe has a long way to go before it can ever reach perfection. If bebe can get back on the path toward greater profitability, though, it at least stands a chance to improve itself over the long haul.
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. The Motley Fool owns shares of Aeropostale and Guess?. Motley Fool newsletter services have recommended writing covered calls in Guess?. 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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