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 Bed Bath & Beyond (Nasdaq: BBBY ) 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 Bed Bath & Beyond.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.0%||Fail|
|1-Year Revenue Growth > 12%||9.1%||Fail|
|Margins||Gross Margin > 35%||41.5%||Pass|
|Net Margin > 15%||9.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.86||Pass|
|Opportunities||Return on Equity > 15%||23.9%||Pass|
|Valuation||Normalized P/E < 20||15.88||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Bed Bath & Beyond last year, the retailer has dropped a point. A drop in revenue growth is responsible for the decline. But the company has actually done better than one might have thought in a tough economic environment.
You'd think that with the housing market in a rut, anything to do with home furnishings would be in the cellar along with it. Yet after hitting bottom in early 2009, Bed Bath & Beyond actually posted a long string of double-digit revenue growth, with sales at record levels. That's similar to the experience at Pier 1 Imports (NYSE: PIR ) , although Pier 1 has done even better, with same-store sales also often hitting 10% or higher during that period. Even higher-end Williams-Sonoma (NYSE: WSM ) has encountered that phenomenon, although its sales have grown at a slower pace.
But more recently, growth has started to slow. As Fool contributor Rick Munarriz suggests, consumers liked Bed Bath & Beyond because its goods were cheap and portable in the event of foreclosure. But now as higher-cost projects boost results at Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) , homeowners will necessarily have less money available for the lower-ticket items that are Bed Bath & Beyond's bread and butter.
To improve its lot, Bed Bath & Beyond needs to buck that slower sales trend and start matching up to its competition. If it can do so, though, then it could find the growth it needs to earn some extra points toward perfection.
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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