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 Under Armour (NYS: UA) 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 Under Armour.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Under Armour last year, the company has picked up an extra point. A boost in returns on equity did the trick, but the stock still carries a very high valuation despite its super-fast growth.
Under Armour is one of retail's success stories in recent years. The company has worked hard to carve out a niche in the sports-related clothing category, taking on Nike (NYS: NKE) by spending millions on endorsement deals to sell its products. That strategy has produced strong revenue growth over the past five years, dwarfing gains at Nike, VF Corp. (NYS: VFC) , and Hanesbrands (NYS: HBI) and lagging only yoga superstar lululemon athletica (NAS: LULU) .
Earlier this week, Under Armour gave investors more great news. Sales jumped 42% in the third quarter, earnings topped expectations, and the company boosted guidance. It also plans to open more stores as well as working with retail partners like Dick's Sporting Goods (NYS: DKS) to create Under Armour "shop-in-shop" concepts to gain floor space and boost sales potential.
To become a perfect stock, Under Armour needs to put high-inventory concerns behind it. Although year-over-year inventory growth rose a whopping 63% in the most recent quarter, that's down from the previous quarter and is due largely to special circumstances like higher commodity costs. Once those factors are under control, Under Armour could move swiftly toward perfection.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
At the time thisarticle was published