Has Nike 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 and then decide whether Nike (NYSE: NKE  ) 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.
  • Moneymaking 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 Nike.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

8%

Fail

 

1-year revenue growth > 12%

13.5%

Pass

Margins

Gross margin > 35%

43.2%

Pass

 

Net margin > 15%

8.7%

Fail

Balance sheet

Debt to equity < 50%

3.6%

Pass

 

Current ratio > 1.3

2.95

Pass

Opportunities

Return on equity > 15%

21.5%

Pass

Valuation

Normalized P/E < 20

24.80

Fail

Dividends

Current yield > 2%

1.7%

Fail

 

5-year dividend growth > 10%

14.2%

Pass

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Nike last year, the company held onto the point it gained from 2010 to 2011. The stock has only given shareholders flat performance over the past year.

Nike remains the premier sports apparel company in the world. With a brand worth an estimated $15 billion, the distinctive swoosh logo is recognizable around the globe.

But sometimes, international scope brings international problems. For instance, as the price of raw materials rose, Nike shared the pain with many of its peers. Yet because Under Armour (NYSE: UA  ) and lululemon athletica (Nasdaq: LULU  ) have less-developed international exposure, they didn't suffer the same issues that Nike did with China's massive slowdown. Moreover, with nonathletic footwear seen sporting stronger growth rates, Deckers Outdoor (Nasdaq: DECK  ) and Crocs (Nasdaq: CROX  ) could end up reaping better rewards than Nike.

That may be one reason Nike has sought to move beyond footwear to the cutting edge with some innovative technology. With its Nike+ FuelBand, the company gives customers the chance to monitor activity and sync up with smartphones to share data with friends and meet fitness goals.

Nike is also trying to focus more on core initiatives. Last month, it agreed to sell its Cole Haan shoe brand to a private-equity firm for $570 million. Following on the heels of its selling of soccer-shoe brand Umbro for $225 million to Iconix Brand Group (Nasdaq: ICON  ) , Nike clearly wants to reduce itself to a more manageable breadth of product offerings.

For Nike to improve, it needs to sustain faster revenue growth and work on boosting earnings faster than its share price. If it can succeed and get a favorable global economy to boot, then Nike could move toward perfection quickly 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.

Nike may be the industry's giant, but lululemon athletica has the potential to grow its sales by 10 times if it can penetrate international markets. Yet the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy shareholders? Find out whether Lululemon is a buy in our in-depth research report. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

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


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