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 Deckers Outdoor (Nasdaq: DECK ) 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 Deckers Outdoor.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||32.6%||Pass|
|1-Year Revenue Growth > 12%||25.8%||Pass|
|Margins||Gross Margin > 35%||50.2%||Pass|
|Net Margin > 15%||15.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||9.51||Pass|
|Opportunities||Return on Equity > 15%||27.3%||Pass|
|Valuation||Normalized P/E < 20||23.93||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Deckers Outdoor wows shoppers with a 7-point performance. The shoemaker has found its way into the world of upscale retail, and that's exactly the place to be these days.
Deckers is the company behind Ugg boots and Teva sandals. Uggs, which retail for around $120 to $200 and up, have become trendy, and since Deckers holds the trademark rights to the brand in more than 100 countries around the world, it has been capitalizing on the fashion trend.
Retail has been a strange place to invest recently. Typical middle-of-the-road retailers have had trouble digging profits out of a sluggish recovery. But apparently, luxury shoppers have no qualms about spending money, as lululemon athletica (Nasdaq: LULU ) , Tiffany (NYSE: TIF ) , and Coach (NYSE: COH ) have all blown past analysts' earnings estimates recently.
Deckers has joined that crowd with a vengeance. The company has enjoyed tremendous growth, both through traditional retail outlets as well as by opening its own retail stores and selling through e-commerce sites. Those strategic moves have helped boost margins and enhance sales.
But the future isn't totally certain for Deckers. Higher costs have plagued the company, leading it to guide earnings expectations lower this quarter. With memories of Crocs (Nasdaq: CROX ) firmly in their minds, investors are being very cautious about anything that looks like a fad stock. But VF's (NYSE: VFC ) recent buyout of rival Timberland (NYSE: TBL ) suggests that interest in the industry isn't going away -- at least from an investing perspective.
Deckers may not be perfect yet, but it has given shareholders exactly what they want in recent years. If it can get past fad status to demonstrate its staying power, Deckers may well achieve perfection in short order.
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.