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 Crocs (NAS: CROX) 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 Crocs.
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%
7 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Crocs last year, the company has seen its score rise by two points. Stronger sales growth this year along with a big drop in the company's earnings multiple gave it the extra points, but the company now sees a more questionable future.
Crocs is well known for its rise and epic collapse several years ago on the back of its namesake rubber shoes. Back in 2006, the company earned 62% of its revenue solely (no pun intended) from its classic models. Since then, though, Crocs has branched out in search of products that are less subject to the vagaries of fashion fads, and investors have responded by bidding the stock up strongly.
But Crocs hardly has the footwear industry to itself. With Nike (NYS: NKE) , Deckers Outdoor (NAS: DECK) , and more recently Under Armour (NYS: UA) all pushing for position in shoes, Crocs has to overcome the fleeting preferences of its customers. Failure to do so can spook investors, as happened earlier this month when the company had an earnings report that reined in guidance for the just-ended quarter.
But despite falling short of analyst expectations on sales and income in the third quarter, Crocs still shows a lot of promise. It has better margins and returns on equity than shoemaking peers Skechers (NYS: SKX) and Wolverine World Wides (NYS: WWW) , and with a new line of shoes targeting golfers and another focusing on back-to-school shoppers, Crocs clearly sees the need to diversify beyond its existing customer base.
To reach perfection, Crocs needs to keep expanding margins and start passing on some of its cash flow to shareholders through dividends. As long as customers keep buying its shoes, Crocs will have the potential to become a perfect stock.
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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