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 Collective Brands (NYSE: PSS ) 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 Collective Brands.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.7%||Fail|
|1-Year Revenue Growth > 12%||2.3%||Fail|
|Margins||Gross Margin > 35%||30.9%||Fail|
|Net Margin > 15%||(3.9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||84%||Fail|
|Current Ratio > 1.3||2.32||Pass|
|Opportunities||Return on Equity > 15%||(15.3%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With only a single point, Collective Brands has its foot in its mouth right now. The company should appeal to its bargain-seeking customer base, but recent results leave a lot to be desired.
Collective Brands is the company behind Payless Shoe Source and Stride Rite shoe stores. But the company also has several well-known shoe brands like Keds. Another example is Saucony, which is an athletic shoe that goes up against products from established leader Nike (NYSE: NKE ) , up-and-coming footwear seller Under Armour (NYSE: UA ) , and other sports-oriented shoe companies.
With the company expanding internationally, it has potential for growth. But so far, sales have been relatively flat, and Collective Brands has been losing money. In its latest quarter, in fact, the company reported a loss of $1.91 per share, far worse than the $0.50 loss that analysts had expected. However, that loss was entirely due to restructuring and strategic review costs -- items that could help get Collective Brands into a better position in the future.
The main problem for Collective Brands is that the shoe business is highly competitive. From SKECHERS (NYSE: SKX ) to Crocs (Nasdaq: CROX ) , Deckers Outdoor (Nasdaq: DECK ) to recently acquired Timberland, everyone's fighting to become or stay fashionable. Until the economy rebounds far enough to raise all ships, Collective Brands doesn't look poised to reach perfection anytime soon.
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."