Has hhgregg 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 hhgregg (NYSE: HGG  ) 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 the 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 hhgregg.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

15.4%

Pass

 

1-year revenue growth > 12%

4.4%

Fail

Margins

Gross margin > 35%

29.2%

Fail

 

Net margin > 15%

2.8%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

1.54

Pass

Opportunities

Return on equity > 15%

20.6%

Pass

Valuation

Normalized P/E < 20

12.56

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 10

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

Since we looked at hhgregg last year, the company hasn't been able to regain the point it lost from 2011 to 2012. The stock has also struggled, falling 10% over the past year despite a pretty strong rebound in recent months.

Like most other electronics retailers, hhgregg has been dealing with the strain of competition from online retail. Given the cost handicap of having brick-and-mortar stores, electronics retailers have suffered from margin pressure and an inability to compete solely on price.

Various ways to address those pressures have had mixed success. Appliances offer an additional draw, as ordering big items online is somewhat challenging. But neither hhgregg nor Sears Holdings (NASDAQ: SHLD  ) , with its immensely popular Kenmore brand, has been able to use its appliance strength to make a big impact on results. For hhgregg, though, an attempt to focus on certain cities and offer high levels of customer service hasn't produced good results. Comparable-store sales fell 9.7% during the holiday quarter on a 23% drop in net income.

For its part, industry leader Best Buy (NYSE: BBY  ) has tried promoting its own online sales. It showed some success during the holiday season, with reports saying its website was among the top-traffic sites on Black Friday and Cyber Monday. Given its flat same-store sales, a change in strategy seems like the best way for Best Buy to try to boost its results.

For hhgregg to improve, it needs to come up with a new strategy to boost sales and stand up to online competition -- or join it by boosting its own online presence. The company's recent move to implement a price-match guarantee that includes online retailers is only likely to threaten margins further, making it hard to imgagine hhgregg moving closer to perfection anytime soon.

Keep searching
No stock is a sure thing, but some stocks are much more nearly 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.

The brick-and-mortar versus e-commerce battle wages on, and Best Buy is caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. To help you get the answers you need, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

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


Read/Post Comments (1) | Recommend This Article (1)

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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.

  • Report this Comment On April 23, 2013, at 10:23 AM, AJermo wrote:

    You didn't answer the question you asked in the title. The content was there with supporting evidence but at the end of the article the reader is left with the unanswered question we started with. As a learning investor I find too many open ended articles like this in TMF. As a TMFSA subscriber it's frustrating to waste my time on open ended faux content with little to no guidance value.

    If you are writing just to fill a quota then perhaps you'd be better served just sharing your thoughts on your holdings, why you have them, why you believe they are good, your investment objectives, and if you are making any progress towards them.

    Good article otherwise. I like the supporting data and graphs.

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