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 Tiffany (NYSE: TIF ) fits the bill.
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 Tiffany.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||5.8%||Fail|
|1-Year Revenue Growth > 12%||13.7%||Pass|
|Margins||Gross Margin > 35%||59.1%||Pass|
|Net Margin > 15%||12%||Fail|
|Balance Sheet||Debt to Equity < 50%||30.1%||Pass|
|Current Ratio > 1.3||6.79||Pass|
|Opportunities||Return on Equity > 15%||18.2%||Pass|
|Valuation||Normalized P/E < 20||26.05||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||33%||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Six points may not make you want to wrap Tiffany up in a light blue box and give it to your sweetie, but it's still a pretty good score. The high-end jeweler has done surprisingly well during the recession.
For retail, it's been a tale of three markets recently. As you'd expect during tough times, bargain-basement companies like Costco (Nasdaq: COST ) and TJX (NYSE: TJX ) held up well during the economic downturn. Mid-range retailers like Dillard's have had mediocre returns. But somewhat surprisingly, high-end sellers like Tiffany and Coach (NYSE: COH ) have also performed well, as luxury sales rose strongly during the holiday season.
All that changed for Tiffany earlier this year, though, when the Japanese earthquake and tsunami hit. Tiffany has almost a quarter of its stores in Japan, with half of its Japanese revenue coming from areas hit hard by the disasters. Tiffany had to cut estimates after the quake, and like Coach, Aflac (NYSE: AFL ) , and Rambus (Nasdaq: RMBS ) -- all of which get a sizable portion of their revenue from the island nation -- Tiffany's reliance on Japan could prove problematic for the near future.
In the long run, though, Tiffany's reputation as a quality luxury retailer should survive temporary factors. Tiffany isn't the perfect stock right now, but if some missed estimates make short-term traders head for the exits, opportunistic investors may just get the chance they've been waiting for.
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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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."