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 Talbots (NYSE: TLB ) 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 Talbots.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(13.9%)||Fail|
|1-Year Revenue Growth > 12%||(6.5%)||Fail|
|Margins||Gross Margin > 35%||29.3%||Fail|
|Net Margin > 15%||(10.0%)||Fail|
|Balance Sheet||Debt to Equity < 50%||1038.6%||Fail|
|Current Ratio > 1.3||1.12||Fail|
|Opportunities||Return on Equity > 15%||(108.7%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||0 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Talbots last year, the company has absolutely fallen off a cliff, losing all four of its points. With the shares off more than 60% in the past year, that shouldn't come as any surprise to anyone who's followed the struggling retailer lately.
Talbots has struggled to regain its relevance for years now with limited success. Even as Coldwater Creek (Nasdaq: CWTR ) and other peers have seen huge operating losses, Talbots also has major balance sheet issues, with debt that dwarfs its tiny shareholder equity to go along with its falling revenue and lack of profits.
The problem so far has been Talbots' complete inability to adjust to changing fashions. By contrast, Chico's (NYSE: CHS ) and ANN (NYSE: ANN ) have seen many of the same problems over the past several years, but they've adapted by changing product lines and resisting the temptation to offer big discounts to clear inventory.
Lately, Talbots has even refused to accept a lifeline. Private equity firm Sycamore Partners offered $3 per share for the retailer, which Talbots argued was insufficient. Yet after getting no encouragement from Talbots' management, Sycamore finally pulled its offer late last week, sending shares plunging once more.
At present, Talbots doesn't appear to have any realistic chance of getting anywhere near perfection. Just surviving its long malaise would be an achievement for the retailer -- one that prudent investors shouldn't bet much on happening.
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.
Talbots 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 Talbots to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.