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 Stage Stores
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 Stage Stores.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 1.8% | Fail |
| 1-Year Revenue Growth > 12% | 2.7% | Fail | |
| Margins | Gross Margin > 35% | 28.3% | Fail |
| Net Margin > 15% | 2.6% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 7.9% | Pass |
| Current Ratio > 1.3 | 2.47 | Pass | |
| Opportunities | Return on Equity > 15% | 7.9% | Fail |
| Valuation | Normalized P/E < 20 | 18.54 | Pass |
| Dividends | Current Yield > 2% | 1.7% | Fail |
| 5-Year Dividend Growth > 10% | 49.0% | Pass | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Stage Stores falls short with a score of 4. Despite facing many of the same challenges that other retailers deal with, Stage Stores has posted some impressive results lately.
Stage Stores is the company behind specialty retailers like Bealls, Peebles, and Goody's. In contrast to larger retailers like Target
Stage's model has been somewhat successful. In its most recent quarter, Stage Stores announced higher-than-expected earnings. But although the stock rose on its guidance, the company expects just 1% to 3% same-store sales growth in 2011.
One mistake Stage Stores may be making is trying to be all things to all people. In an exhibit to its performance-based compensation agreements included in its annual report, the company named not only discount-oriented TJX
The low margins and slow growth that Stage Stores has seen aren't unique to the company; they're largely a general retail phenomenon. If the company is successful in its strategy of catering to an underserved customer base, then it could see its financials improve quickly. For now, though, a wait-and-see approach appears to make the most sense.
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.
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