Has True Religion 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 True Religion (Nasdaq: TRLG  ) 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 True Religion.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

24.7%

Pass

 

1-Year Revenue Growth > 12%

11.1%

Fail

Margins

Gross Margin > 35%

64.4%

Pass

 

Net Margin > 15%

10.6%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

7.80

Pass

Opportunities

Return on Equity > 15%

16.1%

Pass

Valuation

Normalized P/E < 20

13.33

Pass

Dividends

Current Yield > 2%

3.1%

Pass

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

7 out of 9

Source: S&P Capital IQ. NM = not meaningful; True Religion starting paying a dividend in May 2012. Total score = number of passes.

Since we looked at True Religion last year, the company has kept its seven-point score. Revenue growth slowed, but a nice dividend made up for it. Yet the stock ended down about 20% in the past year.

True Religion combines a couple of trends that have been in vogue since the economy bottomed out nearly four years ago: luxury and fashion. Just as lululemon athletica (Nasdaq: LULU  ) has turned the yoga-wear industry upside down with its high-margin, in-demand apparel, True Religion's jeans inspire strong brand loyalty even at premium prices.

Unfortunately, the company has executed terribly over the past year. The stock plunged 28% in February following a big earnings miss for last year's holiday quarter. Then in August, shares lost double-digit percentages again when the company reined in its full-year guidance.

In part because of its operating woes, and partially because of its attractive cash balance and debt-free balance sheet, True Religion said earlier this month that it has considered selling itself. Although competitor Guess? (NYSE: GES  ) focuses on its own products, Buckle (NYSE: BKE  ) sells a variety of different types of jeans, including True Religion's own brand. VF (NYSE: VFC  ) , which makes Lee and Wrangler, might also be a candidate. Yet ultra-premium, $200 jeans aren't in most stores' price range, introducing problems to try to attract interest from an acquirer.

For True Religion to improve, it would need to maintain its independence yet find ways to stoke the fires of its growth. That's a hard sell, and so True Religion's best chances of reaching perfection are likely in the hands of another company.

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 the best investments from the rest.

Check out our free report: "These Stocks  Could Skyrocket After the 2012 Presidential Election." Barack Obama and Mitt Romney have competing visions for getting America back on track, but The Motley Fool will have you prepared to profit -- no matter who wins! Download your copy now, for free, and discover hidden ways to profit from the election.

Click here to add True Religion to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of The Buckle and Guess?. Motley Fool newsletter services recommend The Buckle, Guess?, and lululemon athletica. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2089606, ~/Articles/ArticleHandler.aspx, 10/25/2014 11:05:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement