Is Best Buy the Perfect Stock?

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 Best Buy (NYSE: BBY  ) 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 Best Buy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 12.1% fail
  1-Year Revenue Growth > 12% 7.1% fail
Margins Gross Margin > 35% 24.9% fail
  Net Margin > 15% 2.8% fail
Balance Sheet Debt to Equity < 50% 25.0% pass
  Current Ratio > 1.3 1.18 fail
Opportunities Return on Equity > 15% 25.0% pass
Valuation Normalized P/E < 20 12.92 pass
Dividends Current Yield > 2% 1.3% fail
  5-Year Dividend Growth > 10% 13.7% pass
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 4, Best Buy doesn't look like the best stock. But considering all the pressure in retail and the strides the company has made in recent years, Best Buy's score doesn't reflect its success.

During recessionary times, you'd expect Best Buy, which thrives on sales of high-ticket discretionary items, to suffer. But the company turned the recession into an opportunity, gaining market share from rival Circuit City's demise. And although up-and-comer hhgregg (NYSE: HGG  ) is trying to fill the void left by the Circuit City bankruptcy, Best Buy has still fared far better in turning precious sales into profit.

Of course, Best Buy has plenty of competition. Fellow big-box retailers Sears Holdings (Nasdaq: SHLD  ) and Lowe's (NYSE: LOW  ) compete in the appliance space, while online giant Amazon.com (Nasdaq: AMZN  ) dukes it out with Best Buy on music and video games as well as higher-priced electronics. But Amazon can't give customers the hand-holding they want when spending a bunch of money on HDTVs -- and Best Buy's stock valuation looks a lot more like what you'd want to see when you're shopping than Amazon's.

Best Buy isn't perfect, but in the low-margin, low-growth world of bricks-and-mortar retail, the company does a good job. With little debt, attractive valuations, and a rising dividend, Best Buy is worth a closer look.

Keep searching
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 Best Buy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Amazon.com, Best Buy, and hhgregg are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy and Lowe's, which are both Motley Fool Inside Value picks. 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 Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2010, at 8:46 PM, JAVEROA wrote:

    I really do not think this type of valuation works ' as it is far too general and backward looking.

    As long as the balance sheet is fairly solid and debt manageable, the only thing that matters is future growth. This is the one estimate that stands out and which is hardest to figure out. Even a solid balance sheet doesn't mean much if there is no growth - look at NED.

    There are lots of stocks which pass your test with flying colors but the market believes future growth will be very low, MSFT or INTC for that matter, which is why they are hardly moving whereas a company like APKT shows a > 350% increase in PPS.

    Stock screeners in general do not provide an estimate of future, only the past, and as such should be valued as a necessary first step only.

    Is there any way you can incorporate this into your Screener?

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