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 Nike (NYSE: NKE ) 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 Nike.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.3%||Fail|
|1-Year Revenue Growth > 12%||12.3%||Pass|
|Margins||Gross Margin > 35%||44.9%||Pass|
|Net Margin > 15%||10.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||5.2%||Pass|
|Current Ratio > 1.3||2.94||Pass|
|Opportunities||Return on Equity > 15%||22.7%||Pass|
|Valuation||Normalized P/E < 20||24.98||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||14.9%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Nike last year, the shoe giant has picked up a point. A slight acceleration in sales growth helped push Nike's score from 5 to 6, but it still faces plenty of competition from up-and-coming companies.
Nike played a huge role in shaping the entire athletic apparel industry and has built a ubiquitous presence in the sports world through promotional endorsements. Those efforts have put the Nike brand into the top 25 brands in the world.
But Nike isn't alone in the athletic space. Under Armour (NYSE: UA ) has expanded into the shoe arena and hopes to challenge Nike on its own turf. Yet Nike has such a big lead that even continued growth for Under Armour wouldn't really threaten its dominance.
Moreover, Nike's financial numbers don't blow away the industry. Both Deckers Outdoor (Nasdaq: DECK ) and Crocs (Nasdaq: CROX ) boast better net margins and returns on equity. And while Under Armour and Deckers sport higher earnings multiples, Nike still carries a premium stock price that seems to count on substantial future growth.
Where that growth may come from is China. Many brand-rich companies, including Coach (NYSE: COH ) and Gap (NYSE: GPS ) , have taken their swing at the emerging nation. Nike already has a huge presence in the world's most populous country, but what Nike sees as its biggest challenge is getting sports-watching Chinese consumers to start participating in sports themselves. If it can help through community initiatives, the moves could boost sales.
For Nike, a lot depends on the overall economy. If consumers have money to spend, then premium products like those Nike sells produce better profits for the company. But if the recovery stays tepid at best, then Nike could continue to see sluggish numbers going forward.
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."