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 Jos. A. Bank (NAS: JOSB) 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 Jos. A. Bank.
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 Jos. A. Bank last year, the company has dropped a point. A slight deceleration in revenue growth accounts for the drop, but more disturbing is the stock's 5% drop in the past year.
In apparel, changing trends make it challenging for niche retailers to keep up with the times. With Jos. A. Bank and rival Men's Warehouse (NYS: MW) , the relative popularity of suits and tailored clothing versus more casual clothing from Gap (NYS: GPS) and other retailers goes in and out of vogue. Throughout 2012, Gap has been on the upswing, while Jos. A. Bank has had to make the best of a bad lot.
Much of the problem came from the mild winter. Retailers have to plan in advance for their seasonal offerings, and CEO R. Neal Black said that the company didn't anticipate the full extent of the weather-related problems. By contrast, TJX (NYS: TJX) and Ross Stores (NAS: ROST) likely got a big boost from the winter months, as they were able to provide a better mix of products in front of shoppers who found it easier to brave the lack of elements and go shopping.
Recent strength, however, has led to a turnaround, and now, Jos. A. Bank is striving for more. Last week, the company announced a 13% jump in sales with 12% higher earnings than last year's second quarter. With 6.1% same-store sales growth, the company now believes that it can eventually build its store network to 800 total locations, much higher than the 650- to 675-store cap that the company earlier projected.
For Jos. A. Bank to improve, it needs to get its sales growth back up and start looking for ways to improve margins. Once store expansions are complete, paying a dividend may be the next step in the company's march toward perfection.
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.
Jos. A. Bank may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click hereto add Jos. A. Bank to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has Jos. A. Bank Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.