Has TJX Become the Perfect Stock?

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.

Factor

What We Want to See

Actual

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.

Keep searching
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.

TJX isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add TJX to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2012, at 4:22 PM, wcat9 wrote:

    Please explain how you got debt to equity ratio? My computation is 5072315/3209290 = 1.58051

    Thanks,

  • Report this Comment On May 22, 2012, at 4:23 PM, wcat9 wrote:

    That debt to equity ratio is for TJX. Sorry!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1891853, ~/Articles/ArticleHandler.aspx, 10/1/2014 4:28:23 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement