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 Foot Locker (NYSE: FL ) 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 Foot Locker.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.9%)||Fail|
|1-Year Revenue Growth > 12%||9.8%||Fail|
|Margins||Gross Margin > 35%||43.2%||Pass|
|Net Margin > 15%||4.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||6.4%||Pass|
|Current Ratio > 1.3||3.45||Pass|
|Opportunities||Return on Equity > 15%||11.9%||Fail|
|Valuation||Normalized P/E < 20||12.96||Pass|
|Dividends||Current Yield > 2%||3.4%||Pass|
|5-Year Dividend Growth > 10%||12.8%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, Foot Locker steps up to the plate in fairly strong fashion. The footwear company isn't seeing the sales growth it would like, but in many other respects, its stock looks promising.
Foot Locker has come a long way in the past three years. Back in 2008, the footwear retailer saw its shares plummet due to the recession and its impact on consumer spending. Along with sporting-goods stores like Dick's Sporting Goods (NYSE: DKS ) , Foot Locker found itself in a big hole.
Fast-forward to now, though, and things are looking up for the retailer. Despite lacking the strong growth of Under Armour (NYSE: UA ) and Nike (NYSE: NKE ) , Foot Locker shares doubled from late 2009 to late 2010 and are up still further since then. With a share repurchase program in place and a healthy dividend, the company is definitely keeping shareholders happier than rivals Finish Line (Nasdaq: FINL ) and Collective Brands (NYSE: PSS ) and its Payless shoe division, which can't match Foot Locker's return of capital to investors.
Having dodged the impact that an extended NFL lockout would have had, Foot Locker now must worry about the NBA lockout and the potential loss of the entire basketball season. But at least for now, with strong brands supporting sales, the company has seen double-digit same-store sales growth and continues to open new stores. Foot Locker may not be a perfect stock, but it looks like it has bounced back from its past problems convincingly.
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.