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 bebe stores (Nasdaq: BEBE ) 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 bebe stores.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(4.6%)||Fail|
|1-Year Revenue Growth > 12%||7.6%||Fail|
|Margins||Gross Margin > 35%||39.8%||Pass|
|Net Margin > 15%||2.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||5.10||Pass|
|Opportunities||Return on Equity > 15%||3.3%||Fail|
|Valuation||Normalized P/E < 20||34.86||Fail|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||(17.8%)||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at bebe stores last year, the company hasn't improved on its three-point score. Shareholders aren't too impressed with the retailer either, with the stock having lost about a quarter of its value over the past year.
Throughout the first part of 2012, bebe did an excellent job of navigating the fickle teen and young-adult apparel segment. That's always a tough assignment, as even long-fashionable Abercrombie & Fitch (NYSE: ANF ) couldn't manage to hang on to the baton this year. Meanwhile, just as beaten-down rivals American Eagle Outfitters (NYSE: AEO ) and Aeropostale (NYSE: ARO ) have posted much better results than Abercrombie, bebe's competitors are ready to pounce on any weakness from the retailer.
In May, bebe's good luck came to an end with its fiscal third-quarter report. Despite sales that rose more than 10% and a same-store sales boost of 7.2%, the company couldn't match analysts' expectations. Even worse, its guidance for the fiscal fourth quarter was well below estimates.
Since then, bebe's moves haven't instilled much confidence. Bringing its website operations in-house will add to market and advertising expenses. Unlike Gap (NYSE: GPS ) , which has managed to turn things around this year, bebe hasn't managed to overcome the disadvantage of having fewer stores and less inventory. The departure of corporate president Emilia Fabricant last month led to further defections among investors as the shares plunged once more.
For bebe stores to improve, it needs to get its earnings back up to respectable levels. Sales growth is a step in the right direction, but better margins will be essential if bebe wants to get any 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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