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 Bed Bath & Beyond 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 Bed Bath & Beyond.
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.
When big-box competitor Linens 'n Things liquidated its stores and went to an all-online model, Bed Bath & Beyond became the leading large-format retail specialty chain for home furnishings. Yet while the company rode that position up to hit all-time highs in its stock price during the 2012 spring season, it has seen substantial struggles since.
In December, Bed Bath & Beyond lowered its guidance for its fourth-quarter and fiscal 2012 results that disappointed analysts. With earnings-per-share ranges well below consensus estimates, the home-furnishing company hasn't been able to capitalize on improving conditions to nearly the extent that rivals Pier 1 and Williams-Sonoma have. Pier 1 has engineered a huge turnaround after having flirted with being delisted from the New York Stock Exchange a few years ago, and Williams-Sonoma announced in January a substantial increase in its holiday revenue.
Seeds of a rebound for Bed Bath & Beyond may come from a much stronger housing market. With home sales rising sharply, new and existing homeowners will need more home furnishings, and as long as Bed Bath & Beyond can get its share of that business, it should be able to boost its high-margin sales and get the profit growth that investors want to see.
For Bed Bath & Beyond to get closer to perfection, it needs to focus on sales growth. Given its internal efficiency, getting customers in the door is the key driver for Bed Bath & Beyond's profitability in the long run.
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.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Has Bed Bath & Beyond Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Williams-Sonoma. 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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