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 Lumber Liquidators (NYS: LL) 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 Lumber Liquidators.
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 Lumber Liquidators last year, the company has gained two points. But shareholders are even more pleased, as the stock has fully tripled in value in the past year.
For years, home improvement retailers like Lumber Liquidators were held hostage by the housing crisis. Endless times, prospects for housing-related businesses seemed promising, only to see nascent turnarounds prove to be short-lived. But more recently, improvement in the housing market seems to be picking up more steam.
That improvement has sent many home-related stocks soaring. Lowe's (NYS: LOW) has struggled as the relative laggard among the industry's giants, but Home Depot (NYS: HD) has hit multi-year highs going back to the early 2000s. Niche players Lumber Liquidators and Trex (NYS: TREX) have seen even more impressive gains, as their more discretionary purchases led their stocks to take a much more dramatic hit than mainstays Home Depot and Lowe's. Even peripheral plays like paint makerSherwin-Williams (NYS: SHW) are near 52-week highs.
Still, the compelling argument favoring Lumber Liquidators is just how profitable its stores can be. By concentrating on a potentially high-margin business like hardwood flooring, the company can beat out its competition and get new locations to pay for themselves in relatively short order. Recent earnings are bearing that story out, with net income doubling on same-store sales growth of 12.4% in its most recent quarter.
For Lumber Liquidators to keep improving, it needs the economy not to do a head-fake. If housing can hold up, though, then Lumber Liquidators could keep advancing toward 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 out the best investments from the rest.
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The article Has Lumber Liquidators Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services have recommended buying shares of Trex, Sherwin-Williams, Home Depot, and Lumber Liquidators, as well as writing covered calls on Lowe's. 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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