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 True Religion Apparel (NAS: TRLG) 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 True Religion Apparel.
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.
With seven points, True Religion is making believers out of its investors. The jean-maker has turned a simple product into a huge moneymaker.
True Religion started out as just another wholesale source of jeans for department stores like Nordstrom (NYS: JWN) , Saks (NYS: SKS) , and Macy's (NYS: M) . But in four short years, the company's direct retail and e-commerce segment has gone from a tiny part of the overall business to surpass its wholesale revenue. Over that period, growth in direct sales has represented nearly all of True Religion's overall sales growth.
The phenomenon just confirms what we've seen elsewhere in retail: Luxury is still selling. Whether it's jeweler Tiffany (NYS: TIF) , yoga-pant-seller lululemon athletica (NAS: LULU) , or handbag giant Coach (NYS: COH) , upscale shoppers are still opening their wallets even in a dicey economy.
Earlier this week, True Religion kept up the heat with a strong third-quarter earnings report. Revenue jumped 17% from the year-ago quarter, and sales and adjusted profits both came in ahead of expectations.
For True Religion to make the final jump to perfection, it just needs to open its own purse strings up to start paying a dividend. With healthy fundamentals even in a slow economy, the next true economic expansion should push True Religion straight up toward that 10-point score.
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 Coach. Motley Fool newsletter services have recommended buying shares of Coach and lululemon. 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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