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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Under Armour (NYSE: UA ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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?
|Growth||5-Year Annual Revenue Growth > 15%||30.2%||pass|
|1-Year Revenue Growth > 12%||21.1%||pass|
|Margins||Gross Margin > 35%||49.9%||pass|
|Net Margin > 15%||6.2%||fail|
|Balance Sheet||Debt to Equity < 50%||4%||pass|
|Current Ratio > 1.3||3.52||pass|
|Opportunities||Return on Equity > 15%||14.5%||fail|
|Valuation||Normalized P/E < 20||38.49||fail|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 5, Under Armour finds itself firmly in the middle of the pack. In the cutthroat specialty retail area, even strong companies constantly find themselves facing the challenges of defending their turf and innovating in new directions.
For Under Armour, that innovation has taken an uncertain direction. It has established itself as a force in the sportswear market, as shown by its recent success in extending its sponsorship of the NFL's offseason combine. But two years ago, the company decided to take Nike (NYSE: NKE ) head-on with its decision to produce athletic shoes. That's proven to be a difficult proposition, and skeptics now wonder if the company's strategy makes sense.
Meanwhile, competition from newer companies is a constant threat. In Under Armour's case, one of the biggest up-and-comers is lululemon athletica (Nasdaq: LULU ) , which has taken the women's athletic apparel market by storm. Although Under Armour's growth numbers are impressive, they're nothing compared to lululemon's.
Compared to more mature companies Nike and Columbia Sportswear (Nasdaq: COLM ) , Under Armour is still richly valued, carrying a price that clearly suggests investors expect strong growth to continue. In order to do so, Under Armour needs to establish a strategy that will cement its strengths while giving it the latitude to make realistic forays into new lines of business.
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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