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 Kohl's (NYS: KSS) 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 Kohl's.
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 9
Source: S&P Capital IQ. NM = not meaningful; Kohl's initiated its dividend in March 2011. Total score = number of passes.
With five points, Kohl's has some work to do to reach perfection. But the retailer has done a good job navigating the difficult period of the past several years.
Kohl's is a department store operator that targets middle-income customers. That's been a tough demographic lately; luxury retailers like Tiffany (NYS: TIF) and Coach (NYS: COH) have had better returns on equity and typically find it easier to maintain net margins, while discount retailers like Dollar Tree (NAS: DLTR) can attract cash-poor customers who are trading down to make ends meet.
But Kohl's has succeeded in maintaining slow but steady growth in both revenue and gross margins. Moreover, unlike J.C. Penney (NYS: JCP) , Kohl's managed not only to put up good results in its most recent quarter but also to issue favorable guidance for the year. Yet while competitor Dillard's (NYS: DDS) has seen a huge run-up in its share price, Kohl's shares still trade at a relative bargain.
As a retailer in a typically low-margin business, Kohl's will likely never reach a perfect 10. But continued dividend growth could easily help the stock get incrementally closer to perfection in the near 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 the best investments from the rest.
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At the time thisarticle was published
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