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 Kirkland's (Nasdaq: KIRK ) 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 Kirkland's.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.8%)||Fail|
|1-Year Revenue Growth > 12%||3.6%||Fail|
|Margins||Gross Margin > 35%||39.3%||Pass|
|Net Margin > 15%||4.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.01||Pass|
|Opportunities||Return on Equity > 15%||16.2%||Pass|
|Valuation||Normalized P/E < 20||17.74||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.
With five points, Kirkland's falls right in the middle of our scale. The retailer has had an up-and-down couple of years, but it's been on the upswing again recently.
Kirkland's bills itself as a home decor store, selling a variety of furniture, home accessories, and other items for household use. Unfortunately, that hasn't been the easiest niche to succeed in during the housing slump, as less interest in new-home buying also means less shopping for stuff to put in those newly bought homes. Among home-oriented retailers, only Bed Bath & Beyond (Nasdaq: BBBY ) has managed to sustain strong revenue growth over the past several years. Along with Kirkland's, Pier 1 Imports (NYSE: PIR ) and Williams-Sonoma (NYSE: WSM ) both have sales stuck well below where they were during the housing boom.
But recently, new optimism about a return to housing strength has boosted shares of Kirkland's and its peers. Kirkland's has to compete with online giant Amazon.com (Nasdaq: AMZN ) , but so far, it's done a good job of meeting expectations and posting reasonably strong results. Amazon is great for purchases of standard items, but for unique decorations, online shopping is a lot harder than walking into a store.
For Kirkland's to make more progress toward perfection, it needs to keep looking for new avenues for growth. Whether that comes organically or through acquisitions, a bigger Kirkland's could be well-timed if the housing market is finally approaching a bottom.
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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