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 Foot Locker (NYSE: FL) 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 Foot Locker.
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 Foot Locker last year, the company has kept its six-point score. But investors have to be pleased with the stock's rise of nearly 80% in the past year.
Foot Locker has come a long way with its recent success. As recently as the mid-2000s, the retailer had to do a massive restructuring involving a reduction in store counts in order to survive a highly competitive environment. Now, though, the entire sporting-goods industry has picked up steam.
Despite its gains, though, Foot Locker hasn't benefited as much as some of its competitors. Dick's Sporting Goods (NYSE: DKS) , Hibbett Sports (Nasdaq: HIBB) , and Finish Line (Nasdaq: FINL) have posted stronger share-price gains as consumers seem to prefer their larger stores. Foot Locker's small mall-based stores have still generated good comparable sales, but they may not have the potential to take the company much further unless mall traffic starts booming again.
In its most recent quarter, Foot Locker reported record profits and same-store sales growth of 9.8%. Especially impressive is the way that Foot Locker has taken cost increases from Nike (NYSE: NKE) and other footwear makers and passed them through to customers successfully rather than taking a further margin hit.
For Foot Locker to improve, it needs to keep working on growth. Going to larger stores would be an interesting strategic move for the company to consider 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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