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 Urban Outfitters (Nasdaq: URBN ) 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 Urban Outfitters.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.7%||Fail|
|1-Year Revenue Growth > 12%||8.7%||Fail|
|Margins||Gross Margin > 35%||41.3%||Pass|
|Net Margin > 15%||7.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||2.65||Pass|
|Opportunities||Return on Equity > 15%||14.9%||Fail|
|Valuation||Normalized P/E < 20||26.61||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Urban Outfitters last year, the company has seen its score cut in half. Slower revenue growth and a drop in profitability contributed to the drop, although the stock has actually performed reasonably well, climbing around 15% in the past year.
Teen retail has been a scary place to be recently. With Aeropostale (NYSE: ARO ) and Abercrombie & Fitch (NYSE: ANF ) both having issued forecasts for weak future earnings, many of their peers have felt the pinch. Back in May, Urban Outfitters posted better-than-expected figures, but they still included same-store sales declines of 1% and a double-digit drop in net income.
Still, Urban Outfitters' stock has held up quite well compared to most of the industry, with shares trading near a 52-week high. That's largely because co-founder Richard Hayne was willing to step in when former CEO Glen Senk resigned back in January, and investors have faith that the man who helped lead the retailer to success 40 years ago can engineer a turnaround.
But another element of the company's success has come from attempts to clear out excess inventory and improve its product selection process. In addition, the company gets a relatively high amount of sales from its online presence, something that several of its competitors, including American Eagle Outfitters (NYSE: AEO ) and Chico's (NYSE: CHS ) , would love to see more of in their own operations.
For Urban Outfitters to improve, it needs to keep aiming for high-quality growth that doesn't sacrifice margins or require excess inventory. If it can thread that needle, it could regain the ground it lost over the past year and get a lot closer to perfection in the future.
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 the best investments from the rest.
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