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 Macy's (NYSE: M ) 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 Macy's.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.5%||Fail|
|1-Year Revenue Growth > 12%||6.1%||Fail|
|Margins||Gross Margin > 35%||40.6%||Pass|
|Net Margin > 15%||3.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||124.5%||Fail|
|Current Ratio > 1.3||1.26||Fail|
|Opportunities||Return on Equity > 15%||18.3%||Pass|
|Valuation||Normalized P/E < 20||12.99||Pass|
|Dividends||Current Yield > 2%||1.3%||Fail|
|5-Year Dividend Growth > 10%||(14.8%)||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With only three points, Macy's isn't exactly giving investors a ticker-tape parade. But after struggling during the recession, the retailer has convinced investors that recovery is in sight.
Like many midrange retailers, Macy's had a lot of trouble during the financial slowdown. Many retailers, including Bon-Ton (Nasdaq: BONT ) , Dillard's (NYSE: DDS ) , and Saks (NYSE: SKS ) , struggled with huge levels of debt at a time when getting financing was nearly impossible. Shares of companies throughout the sector plummeted.
But as the crisis eased, Macy's shares exploded back upward. Even though bets on a big retail rebound proved somewhat premature, the stock has nearly tripled in the past two years and is poised not far below its 2007 levels.
More recently, Macy's delivered same-store sales growth of 6.7% in June. With Dillard's sporting a higher multiple on lower growth, you could argue that many investors have seen Macy's as a value play.
Nevertheless, Macy's still faces challenges. The company still has plenty of debt on its balance sheet, and interest rates won't get any more favorable in the years to come. Meanwhile, competition remains fierce in its industry, not just from traditional department stores like J.C. Penney (NYSE: JCP ) , but also from Target (NYSE: TGT ) and other discounters. As nice as a Thanksgiving Day parade can be, Macy's doesn't look like it will get back toward perfection in the near future.
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.