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 Ross Stores (Nasdaq: ROST ) 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 Ross Stores.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.2%||Fail|
|1-Year Revenue Growth > 12%||8.5%||Fail|
|Margins||Gross Margin > 35%||27.5%||Fail|
|Net Margin > 15%||7.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||10.4%||Pass|
|Current Ratio > 1.3||1.64||Pass|
|Opportunities||Return on Equity > 15%||45.9%||Pass|
|Valuation||Normalized P/E < 20||18.93||Pass|
|Dividends||Current Yield > 2%||0.9%||Fail|
|5-Year Dividend Growth > 10%||29.7%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Ross Stores last year, the retailer has kept its five-point score. But the stock's performance has been anything but mediocre, as the company has demonstrated its competitive advantage in a tough retail environment.
In many ways, Ross seems to be behind the times. It doesn't sell anything over the Internet except gift cards for its stores, and unlike most of its competitors, it doesn't spend huge sums of money on advertising or marketing. It also operates only within the U.S., missing out on emerging market growth that so many other retailers have tried to tap.
Right now, frugality is in vogue. Dollar Tree (Nasdaq: DLTR ) and Family Dollar have both seen their stocks soar over the past year as continuing fears of a double-dip recession and lingering unemployment have kept shoppers looking to save. But consumers are also willing to pay up for the right goods, as success at Tiffany (NYSE: TIF ) and lululemon athletica (Nasdaq: LULU ) shows. At more than $3,000, Tiffany's revenue per square foot comes in at No. 2 in RetailSails' rankings of retail chains, while lululemon enjoyed better than 20% growth to $1,800 per square foot.
The genius of Ross is that it taps into both of those prevailing trends. The company offers the combination of the luxury appeal of brand-name fashions with the price consciousness of ultra-discounters. That's been a winning combination for both Ross and rival TJX (NYSE: TJX ) , but Ross has managed to win this battle, topping TJX in sales growth, margin, and return on equity.
For a retail stock to score a perfect 10 on this scale would be nearly impossible. Investors can only hope that Ross can sustain its recent performance, doing its best to keep executing successfully. If it can, then shareholders should be happy with the results.
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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