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 whether lululemon athletica (Nasdaq: LULU ) 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 lululemon.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||53.3%||Pass|
|1-Year Revenue Growth > 12%||57.1%||Pass|
|Margins||Gross Margin > 35%||55.5%||Pass|
|Net Margin > 15%||17.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||4.56||Pass|
|Opportunities||Return on Equity > 15%||39%||Pass|
|Valuation||Normalized P/E < 20||57.76||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With seven points, lululemon strikes a near-perfect pose. The fitness retailer is cashing in on the yoga trend in a major way, and it appears to have plenty of room for growth ahead.
Growth is the name of the game at lululemon, and the company hasn't disappointed investors lately. Just yesterday, the company released quarterly earnings for its holiday quarter, with revenue rising 53% and same-store sales up a whopping 28%. Earnings jumped well beyond what analysts were expecting.
It's increasingly clear that lululemon has honed in on a fast-growing trend. Under Armour (NYSE: UA ) and Nike (NYSE: NKE ) , which similarly count on higher-priced athletic gear, have also consistently seen strong growth and analyst-beating earnings over the past year. But unlike Nike and Gap (NYSE: GPS ) , which recently opened its own new Athleta yoga-inspired flagship store, lululemon has a lot more room for future growth.
High valuations and no dividend are par for the course for a young, growing stock, so you shouldn't expect a perfect 10 anytime soon from lululemon. But if you give it time to stretch and warm up, lululemon might well become the perfect stock in short order.
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.
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