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 Liz Claiborne (NYSE: LIZ ) 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 Liz Claiborne.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(19.5%)||Fail|
|1-Year Revenue Growth > 12%||(6.4%)||Fail|
|Margins||Gross Margin > 35%||53.3%||Pass|
|Net Margin > 15%||(11.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||1.29||Fail|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||1 out of 7|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings and shareholder equity. Total score = number of passes.
With only a single point, Liz Claiborne isn't anywhere near perfection. The company is taking a big gamble on remaking itself, and there's a lot on the line for its future.
Historically, Liz Claiborne aimed itself at baby boomer women, a retail segment that's been fraught with peril in recent years. Just as Talbots (NYSE: TLB ) went through a long attempt to turn the company around -- one that has thus far failed -- so too did Liz Claiborne fail to jump onto the trends that vaulted competitor Chico's (NYSE: CHS ) and other peers to more successful results.
But more recently, Liz Claiborne has sought to reinvent itself. Planning to rename itself Fifth & Pacific, the company sold its arguably best-known Liz Claiborne and Monet brands to JC Penney (NYSE: JCP ) , retaining Kate Spade, Juicy Couture, and Lucky to appeal to a more youthful audience.
That move has borne some fruit, at least early on. Earlier this week, Liz Claiborne announced a 29% drop in adjusted earnings per share that matched analyst expectations, but two of its three brands posted strong sales gains. The shares vaulted upward more than 13% in response.
For Liz Claiborne to make further progress, it needs to keep executing on its turnaround story. In the fickle world of fashion, the company can only hope that its big decision turns out to be the right one.
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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