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 True Religion (NAS: TRLG) 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 True Religion.
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%
7 out of 9
Source: S&P Capital IQ. NM = not meaningful; True Religion starting paying a dividend in May 2012. Total score = number of passes.
Since we looked at True Religion last year, the company has kept its seven-point score. Revenue growth slowed, but a nice dividend made up for it. Yet the stock ended down about 20% in the past year.
True Religion combines a couple of trends that have been in vogue since the economy bottomed out nearly four years ago: luxury and fashion. Just as lululemon athletica (NAS: LULU) has turned the yoga-wear industry upside down with its high-margin, in-demand apparel, True Religion's jeans inspire strong brand loyalty even at premium prices.
Unfortunately, the company has executed terribly over the past year. The stock plunged 28% in February following a big earnings miss for last year's holiday quarter. Then in August, shares lost double-digit percentages again when the company reined in its full-year guidance.
In part because of its operating woes, and partially because of its attractive cash balance and debt-free balance sheet, True Religion said earlier this month that it has considered selling itself. Although competitor Guess? (NYS: GES) focuses on its own products, Buckle (NYS: BKE) sells a variety of different types of jeans, including True Religion's own brand. VF (NYS: VFC) , which makes Lee and Wrangler, might also be a candidate. Yet ultra-premium, $200 jeans aren't in most stores' price range, introducing problems to try to attract interest from an acquirer.
For True Religion to improve, it would need to maintain its independence yet find ways to stoke the fires of its growth. That's a hard sell, and so True Religion's best chances of reaching perfection are likely in the hands of another company.
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.
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The article Has True Religion 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 The Buckle and Guess?. Motley Fool newsletter services recommend The Buckle, Guess?, and lululemon athletica. 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.