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 TJX (NYSE: TJX ) 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 TJX.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.1%||Fail|
|1-Year Revenue Growth > 12%||7.3%||Fail|
|Margins||Gross Margin > 35%||27.7%||Fail|
|Net Margin > 15%||6.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||23.2%||Pass|
|Current Ratio > 1.3||1.66||Pass|
|Opportunities||Return on Equity > 15%||51.1%||Pass|
|Valuation||Normalized P/E < 20||18.55||Pass|
|Dividends||Current Yield > 2%||1.1%||Fail|
|5-Year Dividend Growth > 10%||21.7%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at TJX last year, the company has kept its five-point score. But shares have gone through the roof as the retailer continues to execute well even in a mercurial retail environment.
For the past several years, shoppers have faced two conflicting desires. They need to save money, but they want the latest fashions. That's given TJX and rival Ross Stores (Nasdaq: ROST ) a huge leg up on their competition, because both companies specialize in offering brand-name merchandise at big discounts.
That stands in stark contrast to other retailers' experiences lately. Sears Holdings (Nasdaq: SHLD ) announced late last year that it would have to shut between 100 and 120 stores after a lackluster holiday season. More recently, J.C. Penney (NYSE: JCP ) has tried to adopt a new strategy that emphasizes lower everyday prices over big discounts, but shoppers haven't adapted, and the retailer posted a terrible earnings report for the first quarter as a result.
Yet TJX is simply firing on all cylinders. Even after raising its first-quarter guidance earlier this year, the company managed to beat expectations in its report last week. Moreover, it has a lower valuation than Ross Stores, and while it can't boast anything close to the growth rate of lululemon athletica (Nasdaq: LULU ) , TJX has produced better returns on equity.
For TJX to keep improving, one area to focus on is its dividend. A 21% boost in its payout is a good start, but with a healthy balance sheet, TJX has more room to raise its dividend and reward shareholders.
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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