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 Nordstrom (NYSE: JWN ) 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 Nordstrom.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.5%||Fail|
|1-Year Revenue Growth > 12%||11.7%||Fail|
|Margins||Gross Margin > 35%||37.3%||Pass|
|Net Margin > 15%||6.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||174.9%||Fail|
|Current Ratio > 1.3||1.91||Pass|
|Opportunities||Return on Equity > 15%||36%||Pass|
|Valuation||Normalized P/E < 20||15.84||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||17.3%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Nordstrom last year, the high-end retailer has lost a point. Sales growth over the past year slowed just enough to fail our test, yet the bigger concern is a debt level that continues to rise as a percentage of equity.
Nordstrom stands out from the crowd of luxury retailers because of its strong customer loyalty. At a talk at Fool HQ last year, Whole Foods CEO John Mackey called out Nordstrom and Southwest Airlines (NYSE: LUV ) for their commitment to outstanding customer service, and it's clear that customers respond well to that treatment.
But Nordstrom doesn't take those customers for granted, instead seeking to deliver hot new fashions to keep up with the times. A few years ago, the company hired a product manager from lululemon athletica (Nasdaq: LULU ) to help design a yoga line of its own. The move hasn't exactly detracted from lululemon's success, but it demonstrates how Nordstrom acts proactively to give its customers what they want.
The big question for Nordstrom is whether luxury retail can keep up its strength. Both Tiffany (NYSE: TIF ) and Williams-Sonoma (NYSE: WSM ) , which cater to luxury shoppers as well, gave a poor outlook for the recent holiday season, cutting their guidance as consumers seem to be rediscovering their frugal sides. But on the other hand, strength in the economy could help boost other retailers back up to Nordstrom's level, potentially raising all boats in a recovery.
For Nordstrom, short-term perfection isn't as important as maintaining its huge reputation as an extraordinary high-end retailer. From year to year, the stock may move in and out of favor, but over the long haul, the company treats both customers and shareholders right.
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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