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 Under Armour (NYS: UA) 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 Under Armour.
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 less than 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E less than 20
Current Yield > 2%
5-Year Dividend Growth > 10%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Under Armour is a huge long-term success story, starting out as a niche player in the sporting apparel industry, and gradually expanding to become one of its best-known new brands. Despite an admittedly high valuation, the company has grown quickly enough to put concerns about price to rest, at least for now.
One handicap that Under Armour has against competitors Nike (NYS: NKE) and lululemon athletica (NAS: LULU) is that, unlike those two companies, Under Armour has a very limited number of retail locations, many of them factory outlets. A deal with Dick's Sporting Goods (NYS: DKS) , however, gave Under Armour the chance to put mini-stores inside Dick's locations, at least giving it an ability to highlight its own goods prominently.
Under Armour is doing a number of innovative things to try to stand out from the crowd. It recently put an accelerometer in its signature stretch shirts that can track each side of the body separately, giving useful health and fitness data. Meanwhile, the company is reaching out to women with its UA Studio brand, hoping to build a positive customer experience for the entire family. Footwear revenue is also continuing to grow, and attacks Nike's traditional area of strength.
In its quarterly report earlier today, Under Armour posted net income growth of 25% on a 24% jump in revenue. Margins improved, and the company pushed its full-year sales guidance to the top end of its previous range. Still, the company faces a potential challenge from Amazon.com (NAS: AMZN) . The online retailer is targeting sporting goods, which could hurt Dick's and other retailers that sell Under Armour products.
For Under Armour to improve, it needs to get its earnings growth to match up with its stock price. Once that happens, Under Armour could start moving even closer to 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 out the best investments from the rest.
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The article Has Under Armour Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Dick's Sporting Goods, Nike, and Under Armour. Motley Fool newsletter services recommend Amazon.com, Lululemon Athletica, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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