Is hhgregg 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 hhgregg (NYSE: HGG  ) 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 hhgregg.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 17.6% Pass
  1-Year Revenue Growth > 12% 34.2% Pass
Margins Gross Margin > 35% 30.1% Fail
  Net Margin > 15% 2.2% Fail
Balance Sheet Debt to Equity < 50% 29.7% Pass
  Current Ratio > 1.3 1.92 Pass
Opportunities Return on Equity > 15% 16.1% Pass
Valuation Normalized P/E < 20 12.75 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   6 out of 10

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

With six points, hhgregg makes an above-average showing, but the electronics retailer is struggling to remain relevant as pressure from online competitors ramps up.

When Circuit City went bankrupt, the news was good for hhgregg. Although most investors focused on Best Buy (NYSE: BBY  ) as the big winner from Circuit City's failure, hhgregg and its regional presence in the eastern U.S. also grabbed a piece of Circuit City's old market share. You can see that in hhgregg's revenue growth, which has risen much faster than Best Buy's 5.6% pace over the past year and has decimated Conn's (Nasdaq: CONN  ) and its 20% sales drop.

Lately, though, the entire bricks-and-mortar electronics industry has come under attack. Amazon.com (Nasdaq: AMZN  ) benefits from no-tax sales in most states and saw 68% growth in electronics revenue in its most recent quarter. That has put a damper on hhgregg's results, with same-store sales falling 6.2% in its last report.

To become perfect, hhgregg needs to show it can survive a down cycle for the electronics retail industry. If it can eat into Best Buy's big lead, then perfection might be a worthy goal down the road.

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 hhgregg to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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.

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 choices. The Fool owns shares of Best Buy, which is also a Motley Fool Inside Value recommendation. 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.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

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 March 11, 2011, at 2:52 AM, Rowants wrote:

    Why is it that the articles pointing out that HGG is crap only got posted after SA recommended it at $20+????

  • Report this Comment On March 11, 2011, at 11:44 AM, O2M wrote:

    I agree. Motley Fool made the reco at 22 and sucked me in. More like Motley Idiots. Avoid these guys......

  • Report this Comment On March 11, 2011, at 4:25 PM, 9infinity9 wrote:

    Buying more than 1 stock from their recommendations helps insulate you from a big loss like on HGG. I've lost nearly 100% on some of my investments from these guys....... I've also gained well over 100% on numerous good picks........... it's still up to you to invest wisely, they're not your broker.

  • Report this Comment On March 12, 2011, at 7:29 PM, Rowants wrote:

    The beef I have is the timing, they recommend it, and it takes a huge dump shortly thereafter. I bought energizer at $65 and it dropped to $55, so bought more, and it came back. Kinda wish I had sold not to long ago for $70 (would have bought back again at $65, but thats hindsight for you. HGG on the other hand, they rec, it tanks, then they put out articles saying HGG is bad. No kidding. Don't these guys somewhat work together? I wish MF would put as much effort into keeping us updated on their recommended stocks as they do into publishing their daily bs, which seems to center around apple, amazon, best buy, and a couple others.

  • Report this Comment On May 09, 2011, at 8:31 PM, JDM62 wrote:

    Not sure how you can construe this article as saying HGG is bad. It still looks very good to me. Perhaps you're missing the Foolish Investment mantra...invest over time. I've been very very happy with MF.

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