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 Finish Line (Nasdaq: FINL ) 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 Finish Line.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.6%||Fail|
|1-Year Revenue Growth > 12%||11.4%||Fail|
|Margins||Gross Margin > 35%||35.1%||Pass|
|Net Margin > 15%||6.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.99||Pass|
|Opportunities||Return on Equity > 15%||16.6%||Pass|
|Valuation||Normalized P/E < 20||13.09||Pass|
|Dividends||Current Yield > 2%||1.1%||Fail|
|5-Year Dividend Growth > 10%||16%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, Finish Line hasn't broken the ribbon at the end of the race just yet. The company has a well-known retail name, but that hasn't translated to profit growth.
Finish Line primarily sells athletic footwear, with some incidental apparel and accessory offerings as well. With the company's primary supplier being Nike (NYSE: NKE ) , Finish Line is trying to take advantage of Nike's brand strength to boost sales. Yet with Nike itself having retail stores and Under Armour (NYSE: UA ) looking to boost its own shoe line, Finish Line has tried to focus on the high-end market in order to differentiate itself, in part by buying out a chain of specialty running stores.
Unfortunately, Finish Line isn't matching up to investor expectations. Although the retailer beat revenue estimates and matched on earnings per share during the holiday quarter, it made a forecast that profits would drop a whopping 30%. That sent shares down 16% on Friday, as margin contraction is the last thing the retailer needs right now.
By contrast, competitor Foot Locker (NYSE: FL ) looks a lot healthier. Its higher dividend has attracted investor attention, with the stock jumping more than 50% in the past year and rebounding strongly from threats of an NBA lockout. Yet compared to Collective Brands (NYSE: PSS ) , whose Payless Shoe Source division sells a wider variety of footwear, Finish Line's specialization in the athletic segment makes for a better strategy in the current environment.
For Finish Line to achieve perfection, it needs to do a better job of managing its promotional calendar to take advantage of hot products. Only then will it be able to push its margins higher and start generating the growth it so desperately needs.
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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