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 Crocs (Nasdaq: CROX ) 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 Crocs.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||71.9%||pass|
|1-Year Revenue Growth > 12%||11.9%||fail|
|Margins||Gross Margin > 35%||52.5%||pass|
|Net Margin > 15%||6.9%||fail|
|Balance Sheet||Debt to Equity < 50%||0.9%||pass|
|Current Ratio > 1.3||2.57||pass|
|Opportunities||Return on Equity > 15%||16.5%||pass|
|Valuation||Normalized P/E < 20||36.31||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, Crocs makes an average showing. But there's nothing average about the roller-coaster ride that Crocs shareholders have gone through in recent years.
Until late 2007, Crocs was the darling of the stock market. Strong growth supported a soaring stock price, thwarting short-sellers and enriching shareholders. The fact that the company relied largely on its signature big-holed rubber shoes was a mere afterthought.
Fast forward just one year, and Crocs had lost 98% of its share value. Most people chalked up Crocs as another in a long line of similar fad stocks, like Heelys (Nasdaq: HLYS ) and its built-in skate shoe.
But Crocs is back. Branching out to boots, sandals, and other footwear products, Crocs is looking less like a fad stock and more like a mature company. Growth hasn't kept its earlier torrid pace, but the stock has put in a 14-bagger since its November 2008 lows.
Unfortunately for the company, though, Crocs isn't on top of its industry anymore. Both Skechers (NYSE: SKX ) and Deckers Outdoor (Nasdaq: DECK ) have offered more solid recent growth at cheaper valuations. Still, for Crocs to have risen from its deathbed is a feat in itself.
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.
Click here to add Crocs to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.