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 Stage Stores (NYS: SSI) 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 Stage Stores.
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.
Since we looked at Stage Stores last year, the company has improved by a point. Share-price weakness helped push the retailer's yield up above the 2% mark.
Stage Stores operates the specialty retail chains Bealls, Peebles, and Goody's. Although Ross Stores (NAS: ROST) and TJX's (NYS: TJX) TJ Maxx have had success building sales even in a tough economic environment, Stage Stores' chains have suffered from lagging revenue and tight margins.
Perhaps as a result, Stage Stores is going through some internal turmoil. Last week, CEO Andy Hall resigned, marking a disconcerting end to a tough month in which the retailer posted a disappointing outlook despite fairly impressive same-store sales numbers. With other high-level corporate shake-ups at Talbots (NYS: TLB) and Avon Products (NYS: AVP) occuring in response to subpar performance, investors have to wonder whether Hall's move reflects trouble ahead or is merely for reasons unrelated to business.
Nevertheless, Stage Stores has managed to reward shareholders with a 2%-plus dividend yield and substantial payout growth. That won't be enough to get the retailer to perfection, but it's a good sign for the company's future. If Stage Stores can take action to differentiate itself from other smaller retailers, I could easily see it making a run at a better score in the years to come.
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 in this article. 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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