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 VF (NYSE: VFC ) 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 VF.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.4%||Fail|
|1-Year Revenue Growth > 12%||9.2%||Fail|
|Margins||Gross Margin > 35%||46.8%||Pass|
|Net Margin > 15%||7.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||23.7%||Pass|
|Current Ratio > 1.3||2.85||Pass|
|Opportunities||Return on Equity > 15%||15.4%||Pass|
|Valuation||Normalized P/E < 20||18.08||Pass|
|Dividends||Current Yield > 2%||2.5%||Pass|
|5-Year Dividend Growth > 10%||17.0%||Pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
VF makes an impressive showing with a score of 7. The apparel maker has had to deal with macroeconomic headwinds, but recently scored a huge acquisition that should be good for shareholders going forward.
VF is the company behind Wrangler jeans, North Face outdoors products, and Vans shoes, among many other popular clothing lines. Although fellow denim sellers Joe's Jeans (Nasdaq: JOEZ ) and True Religion (Nasdaq: TRLG ) have seen rising cotton prices pressure their bottom lines, VF's product diversity and brand loyalty have cushioned the blow, allowing the company to post record profits lately.
But VF's coup de grace for its competitors may be its huge buyout of Timberland (NYSE: TBL ) earlier this month. With VF competitor Volcom (Nasdaq: VLCM ) having received an offer from French retailer PPR, it's clear that acquisitions are the name of the game in the industry, and investors apparently like the idea of VF scaling up. News of the buyout sent shares of both companies soaring.
With the buyout, VF expects its outerwear segment to make up about 60% of its overall business by 2015. With the Timberland purchase, VF may well get there -- and bring along shareholders for what could prove to be a perfect ride. For those willing to enjoy a high and growing dividend payout along the way, VF may be a great fit for your portfolio.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.