Has Sears Holdings Become the Perfect Stock?

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 Sears Holdings (Nasdaq: SHLD  ) 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 Sears Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(4.9%)

Fail

 

1-Year Revenue Growth > 12%

(2.9%)

Fail

Margins

Gross Margin > 35%

26.2%

Fail

 

Net Margin > 15%

(6.8%)

Fail

Balance Sheet

Debt to Equity < 50%

73.4%

Fail

 

Current Ratio > 1.3

1.13

Fail

Opportunities

Return on Equity > 15%

(43.3%)

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 Sears Holdings last year, the company has lost its only point. The stock has also posted a modest loss, falling more than 10% in the past year.

Traditional big-box retailers have had a horrendous time ever since the recession hit. After last year's holiday season was over, Sears announced that it would close 100 to 120 Sears and K-Mart stores in order to cut costs and consider smaller-store formats. That move is consistent with what Best Buy (NYSE: BBY  ) announced later in the year, and office-products retailer OfficeMax (NYSE: OMX  ) has also said it's going to be closing locations.

But even slightly better economic conditions haven't rescued Sears. The stock got booted out of the S&P 500 index in late August, and even though Sears reported narrower losses in the second quarter, the company's Sears Canada division dragged down revenue for the entire company.

The big question going forward will be whether planned spinoffs of Sears Hometown and Outlet Stores (Nasdaq: SHOSR  ) and Sears Canada will unlock value for shareholders or merely represent an orderly liquidation of Sears Holdings' assets. With the Sears Hometown spinoff consisting of a rights offering, rights-holders will pay Sears Holdings $15 for shares, giving the parent value that it can then presumably distribute to investors.

Unlike J.C. Penney (NYSE: JCP  ) , which is making colossal moves to restructure and reinvigorate its business, Sears seems to be under no illusions that it's trying to remake itself as a stronger retailer going forward. With revenue set to contract as it sells off businesses, Sears simply isn't going to be a perfect stock in the future.

Keep searching
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.

Sears Holdings may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular 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 Sears Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Best Buy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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