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 Jos. A. Bank Clothiers (Nasdaq: JOSB ) 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 Jos. A. Bank.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||12.8%||Fail|
|1-year revenue growth > 12%||13.4%||Pass|
|Margins||Gross margin > 35%||62.8%||Pass|
|Net margin > 15%||10%||Fail|
|Balance sheet||Debt to equity < 50%||0%||Pass|
|Current Ratio > 1.3||4.40||Pass|
|Opportunities||Return on equity > 15%||19.3%||Pass|
|Valuation||Normalized P/E < 20||14.89||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 & Poor's. Total score = number of passes.
Jos. A. Bank cleans up pretty well with a score of six. The specialty retailer of men's clothing has done a great job of converting what could be a low-margin business into plus-sized returns for shareholders.
Jos. A. Bank is well-known for its suits, sports jackets, and business casual clothing. Unlike Men's Wearhouse (NYSE: MW ) , which unabashedly aims itself at the discount end of the market with its low-cost promises, Jos. A. Bank has managed to project an air of higher quality while still competing on price. Compared to all-purpose retailers Macy's (NYSE: M ) , J.C. Penney (NYSE: JCP ) , and even Nordstrom (NYSE: JWN ) , Jos. A. Bank's focus on men's clothing arguably makes its shoppers more comfortable, leading to greater sales.
That focus has brought strong financial results over the years. The company saw same-store sales rise strongly even through the worst of the recession, compared to drops for Men's Wearhouse from 2007 to 2009. With consistent returns on equity near 20% for years, as well as no debt and a reasonable valuation, it's no surprise that the stock has seen some big gains.
Lately, even a mild recovery has accelerated Jos. A. Bank's success. Earlier this week, the company announced same-store sales growth of nearly 15%, with analyst-beating results on the top and bottom lines. With the company recently opening up its website to international orders in 90 countries, the future looks increasingly bright for the company.
Jos. A. Bank falls short of perfection on our scale, but it has a lot going for it. In time -- and once the company opens its wallet to start paying a dividend -- it may well start looking even more like a perfect stock.
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.