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 Zumiez (NAS: ZUMZ) 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 Zumiez.
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 Zumiez last year, the company has kept its five-point score. But with a gain of nearly 60% over the past year, the stock has left investors feeling anything but flat.
Zumiez has been one of the few winners in the teen retail space recently. Fellow teen-targeting retailers Aeropostale, Abercrombie & Fitch (NYS: ANF) , and American Eagle Outfitters (NYS: AEO) have all faced huge challenges that they've struggled to try to overcome, stuck with inventory that they've had to get rid of through competitive price undercutting that has chopped margins across the industry. By contrast, Zumiez has been opening new stores and boosting its comps substantially.
One possible explanation comes from the popularity of the surfing-related styles that Zumiez offers. Yet despite a strong showing in late 2011, shares of Quiksilver (NYS: ZQK) have plunged recently after the company missed estimates on first-quarter earnings. Pacific Sunwear (NAS: PSUN) has seen a similar trend in its shares, running up in early 2012 before giving back those gains in the past couple of months.
Yesterday, Zumiez announced continuing strength in sales in May. Revenue for the four weeks ending May 26 jumped almost 24%. Same-store sales came in with an impressive 13.7% gain, beating estimates for the ninth month in a row.
For Zumiez to keep improving, it needs to ride the wave of positive consumer sentiment while working on keeping its margins up. If it can do that, then it will be in a position to make more moves toward achieving perfection in the years ahead.
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 in this article. The Motley Fool owns shares of Aeropostale. 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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