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 Chico's FAS (NYS: CHS) 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 Chico'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%
4 out of 9
Source: S&P Capital IQ. NM = not meaningful; Chico's started paying a dividend in March 2010. Total score = number of passes.
Since we looked at Chico's last year, the company has seen a two-point drop in its score. Minor improvements in margins and return on equity weren't enough to make up for slower revenue growth.
Chico's targets older female shoppers with its fashions. That segment has taken a hard hit since even before the financial crisis. The women's retailer still dominates its competition, with wider net margins even than more youth-focused retailers like American Eagle Outfitters (NYS: AEO) and Zumiez (NAS: ZUMZ) that allow it to produce profits without excessive leverage. But its stock still languishes well below its levels from 2006 and early 2007.
Still, Chico's is holding its own better than some of its close competitors. Coldwater Creek (NAS: CWTR) , for instance, has seen its stock plunge as sales drop and losses soar. But both Chico's and ANN's (NYS: ANN) Ann Taylor stores have seen increased traffic. Fellow Fool Sean Williams believes that Chico's or ANN should take advantage of having no debt to buy up weaker plays like Coldwater Creek and Talbots (NYS: TLB) , which has also struggled.
To reverse its slide on our 10-point scale, Chico's needs a recovery in its key demographic. If an economic recovery boosts the ability of older women to spend again, then Chico's could once again get its place in the sun.
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 Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Zumiez. 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.