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 Francesca's Holdings (Nasdaq: FRAN ) 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 Francesca's Holdings.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||56.5%*||Pass|
|1-Year Revenue Growth > 12%||48.5%||Pass|
|Margins||Gross Margin > 35%||62.9%||Pass|
|Net Margin > 15%||12.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||43.3%||Pass|
|Current Ratio > 1.3||1.79||Pass|
|Opportunities||Return on Equity > 15%||98.6%**||Pass|
|Valuation||Normalized P/E < 20||42.01||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *3.25-year growth rate. **Based on most recent shareholder equity.
With six points, Francesca's Holdings puts up a good score. Even in a tough retail environment, the young-adult-oriented retailer has put up some impressive growth numbers in recent years.
Francesca's just went public less than a year ago, but it's already drawing favorable comparisons to lululemon athletica (Nasdaq: LULU ) and rue21 (NYSE: RUE ) , and not just because all three chains insist on all-lowercase letters for their store names. High growth and strong margins at Francesca's put it head-and-shoulders above most of its competitors, which have struggled to maintain mid-single-digit margins.
Part of Francesca's success comes from its mix of offerings. Rather than just selling apparel, Francesca's has borrowed a page from Coach (NYSE: COH ) and Michael Kors (NYSE: KORS ) by also including jewelry and accessories within its collections. By having a wide range of merchandise available, Francesca's has built up its appeal to trend-seeking shoppers.
Last week, Francesca's came out with quarterly numbers that led to a big turnaround for the shares. With analyst-beating performance and positive guidance for the current quarter, Francesca's has seen margins expand and has boosted same-store sales by a whopping 15.5%. That's exactly what a company trading at such a rich multiple needs to deliver, quarter in and quarter out.
In high-growth mode, Francesca's won't see its score improve much until it gets to the point at which it considers paying a dividend. But for momentum investors willing to pay premium valuations for a stock with potential, Francesca's deserves a closer look.
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.
Francesca's Holdings may not be the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest 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 Francesca's Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.