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 Deckers Outdoor (Nasdaq: DECK ) 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 Deckers Outdoor.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||34.6%||Pass|
|1-year revenue growth > 12%||35.1%||Pass|
|Margins||Gross margin > 35%||48.6%||Pass|
|Net margin > 15%||13.2%||Fail|
|Balance sheet||Debt to equity < 50%||0%||Pass|
|Current ratio > 1.3||6.81||Pass|
|Opportunities||Return on equity > 15%||25.2%||Pass|
|Valuation||Normalized P/E < 20||10.83||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Deckers Outdoor last year, the company has kept its seven-point score. Margins have slumped somewhat, but the shoemaker's stock looks a lot more like a bargain after its shares dropped 50% over the past year.
In 2011, Deckers looked like it was on top of the world. Demand for its fashionable UGG and Teva shoe lines was strong, and the company seemed to be outpacing competitors Crocs (Nasdaq: CROX ) and SKECHERS (NYSE: SKX ) .
But then, the bottom fell out for Deckers. After announcing a terrible outlook to start off 2012, shares started plunging, and high costs and fickle style sense combined to continue that drop in the ensuing months. Although Crocs and Nike (NYSE: NKE ) had the same expense challenges, their more diversified product lines made it easier to pass cost increases onto customers.
Part of the problem has been getting retailers to display Deckers' full line of products. With Deckers' five biggest customers, which includes Nordstrom (NYSE: JWN ) , representing almost a quarter of its revenue, the company hasn't had as much leverage to negotiate with sellers as it might like. So to remedy the situation, CEO Angel Martinez is bypassing retailers by opening its own retail stores. That's a risky move in a sluggish economy, but it does give the company much more control of its own destiny.
For Deckers to improve, it needs to get its margins back up by passing some of those higher costs through to customers. Once it does that, it can start focusing on making dividend payments and aiming even higher toward true perfection.
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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