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 Columbia Sportswear (NAS: COLM) 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 Columbia Sportswear.
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: S&P Capital IQ. Total score = number of passes.
With five points, Columbia Sportswear gets to the middle of our 10-point scale. The apparel designer has suffered alongside most of its peers recently, but things may be starting to look up for the company.
Columbia is well known for its sports apparel. Unfortunately, many of its competitors have managed to maintain far stronger margins and faster growth than Columbia, including Under Armour (NYS: UA) , lululemon athletica (NAS: LULU) , and Nike (NYS: NKE) . Even VF Corp. (NYS: VFC) , which bought Timberland earlier this year, has beaten Columbia on those metrics recently.
One problem that has faced the clothing maker is the fact that Columbia products often end up in discount sales. To counter that trend and the reputational hit that accompanies it, Columbia announced a high-end luxury-targeted clothing line for exclusive sale at select Nordstrom (NYS: JWN) locations as well as a New York City boutique.
Earlier this week, Columbia announced earnings that came in far ahead of what analysts had expected. The earnings beat pushed shares up, although it's still unclear whether the company will be able to beat out general uncertainty about the health of consumers entering the holiday season.
For Columbia to reach perfection, it needs to sustain its recent momentum through Christmas and beyond. If it can do so, continuing its dividend growth and higher sales trends, Columbia could be exactly the stock you need to survive the wilderness of a volatile market.
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. The Motley Fool owns shares of lululemon athletica and Under Armour. Motley Fool newsletter services have recommended buying shares of Nike, Under Armour, and lululemon athletica, as well as creating a diagonal call position in Nike. 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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