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 Crocs (NAS: CROX) 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 Crocs.
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.
Crocs is famous for its share price volatility. After soaring during the mid-2000s, Crocs shares tanked, as the fad of its namesake shoe brand apparently came to an end. Yet, rather than simply fading away, Crocs actually managed to rebound and find its second wind, regaining much of its losses by around this time last year.
Since then, though, Crocs has struggled. Unlike footwear specialists Nike (NYS: NKE) and Skechers (NYS: SKX) , which managed to post significant gains to hit yearly highs earlier this year, Crocs and Deckers Outdoor (NAS: DECK) haven't shown much promise at all, consistently trying to reduce analysts' expectations and rein in guidance. Moreover, Crocs got into the toning-shoe business, which has led to lawsuit settlements from Skechers, Reebok, and New Balance, as well as retailer Target (NYS: TGT) .
Yet, Crocs is a lot different from what it was several years ago. It has a much more diverse set of brand offerings as it tries to eliminate its seasonality, which used to lead to big disparities across calendar quarters. It's also penetrated emerging markets, and tried to cash in on the same international trends that Nike and other apparel and footwear companies have identified as a big potential target.
In its earnings release Wednesday night, Crocs reported record quarterly revenue, and a jump of nearly 50% in net income. Yet, guidance for the fourth quarter of break-even results was a huge disappointment, and that sent shares plummeting 20% yesterday after the announcement.
For Crocs to improve, it needs to continue working on boosting year-round revenue, and finding an extra bit of margin expansion. If it succeeds with that, Crocs could easily find itself closer to perfection in the near future.
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 Crocs 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 Crocs, Nike, and SKECHERS USA. Motley Fool newsletter services recommend Nike. 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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