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 Kohl's
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 Kohl's.
Factor |
What We Want to See |
Actual |
Pass or Fail? |
---|---|---|---|
Growth |
5-Year Annual Revenue Growth > 15% |
5.5% |
Fail |
1-Year Revenue Growth > 12% |
4.5% |
Fail |
|
Margins |
Gross Margin > 35% |
38.4% |
Pass |
Net Margin > 15% |
6.2% |
Fail |
|
Balance Sheet |
Debt to Equity < 50% |
52.2% |
Fail |
Current Ratio > 1.3 |
1.76 |
Pass |
|
Opportunities |
Return on Equity > 15% |
15.1% |
Pass |
Valuation |
Normalized P/E < 20 |
12.73 |
Pass |
Dividends |
Current Yield > 2% |
2% |
Pass |
5-Year Dividend Growth > 10% |
NM |
NM |
|
Total Score |
5 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Kohl's initiated its dividend in March 2011. Total score = number of passes.
With five points, Kohl's has some work to do to reach perfection. But the retailer has done a good job navigating the difficult period of the past several years.
Kohl's is a department store operator that targets middle-income customers. That's been a tough demographic lately; luxury retailers like Tiffany
But Kohl's has succeeded in maintaining slow but steady growth in both revenue and gross margins. Moreover, unlike J.C. Penney
As a retailer in a typically low-margin business, Kohl's will likely never reach a perfect 10. But continued dividend growth could easily help the stock get incrementally closer to perfection in the near future.
Keep searching
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 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 ."