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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 Pier 1 Imports (NYSE: PIR ) 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 Pier 1 Imports.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.5%)||Fail|
|1-Year Revenue Growth > 12%||9.5%||Fail|
|Margins||Gross Margin > 35%||42.8%||Pass|
|Net Margin > 15%||11.1%||Fail|
|Balance Sheet||Debt to Equity < 50%||2.1%||Pass|
|Current Ratio > 1.3||2.55||Pass|
|Opportunities||Return on Equity > 15%||38.7%||Pass|
|Valuation||Normalized P/E < 20||19.88||Pass|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||(16.7%)||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Pier 1 Imports last year, the company has held on to its five-point score. But investors are especially impressed, with the stock rising more than 65% over the past year.
Pier 1 has rebounded from the edge of the abyss. Five years ago, the company seemed doomed to retail irrelevance, with a tired inventory that was unable to inspire sales gains. But after fighting a legal battle with TJX (NYSE: TJX ) to hire CEO Alex Smith, Pier 1 set about trying to pull out of its nosedive.
Despite continuing to fall during the market meltdown, Pier 1 has made a lot of progress. The company has closed stores, cut jobs, and gotten more favorable terms from store landlords. Same-store sales grew by double-digit percentages in the fourth quarter of its 2012 fiscal year and have stayed strong this year, outpacing higher-priced rival Williams-Sonoma (NYSE: WSM ) as well as furnishings giant Bed Bath & Beyond (Nasdaq: BBBY ) . That's especially impressive when you consider that both Bed Bath & Beyond and Williams-Sonoma have higher net margins than most retail companies -- albeit not as high as Pier 1's recent margins.
Still, Pier 1 isn't entirely invulnerable to macroeconomic trends. With the housing market still struggling to hit bottom, home furnishings have taken an especially hard hit. Still, new signs of life in housing have sparked renewed strength in home-improvement retailer Home Depot (NYSE: HD ) , and if the early indications don't fizzle out this time around, it could bode well for Pier 1 as well.
For Pier 1 to improve, it needs to keep finding ways to keep margins high while working on boosting sales. With a little help from the economy, Pier 1 could be just beginning a new phase of growth that could take it much closer to perfection in the years ahead.
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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