Has Lumber Liquidators 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 Lumber Liquidators (NYSE: LL  ) 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 Lumber Liquidators.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

15.3%

Pass

 

1-Year Revenue Growth > 12%

17.2%

Pass

Margins

Gross Margin > 35%

36.5%

Pass

 

Net Margin > 15%

4.8%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

2.80

Pass

Opportunities

Return on Equity > 15%

17.4%

Pass

Valuation

Normalized P/E < 20

35.94

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.

Since we looked at Lumber Liquidators last year, the company has gained two points. But shareholders are even more pleased, as the stock has fully tripled in value in the past year.

For years, home improvement retailers like Lumber Liquidators were held hostage by the housing crisis. Endless times, prospects for housing-related businesses seemed promising, only to see nascent turnarounds prove to be short-lived. But more recently, improvement in the housing market seems to be picking up more steam.

That improvement has sent many home-related stocks soaring. Lowe's (NYSE: LOW  ) has struggled as the relative laggard among the industry's giants, but Home Depot (NYSE: HD  ) has hit multi-year highs going back to the early 2000s. Niche players Lumber Liquidators and Trex (NYSE: TREX  ) have seen even more impressive gains, as their more discretionary purchases led their stocks to take a much more dramatic hit than mainstays Home Depot and Lowe's. Even peripheral plays like paint maker Sherwin-Williams (NYSE: SHW  ) are near 52-week highs.

Still, the compelling argument favoring Lumber Liquidators is just how profitable its stores can be. By concentrating on a potentially high-margin business like hardwood flooring, the company can beat out its competition and get new locations to pay for themselves in relatively short order. Recent earnings are bearing that story out, with net income doubling on same-store sales growth of 12.4% in its most recent quarter.

For Lumber Liquidators to keep improving, it needs the economy not to do a head-fake. If housing can hold up, though, then Lumber Liquidators could keep advancing toward perfection in the years ahead.

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.

Lumber Liquidators may not be perfect, but we've got some other ideas you might 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 Lumber Liquidators to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services have recommended buying shares of Trex, Sherwin-Williams, Home Depot, and Lumber Liquidators, as well as writing covered calls on Lowe's. 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 Fool has a disclosure policy.


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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 August 30, 2012, at 9:54 AM, fmonic wrote:

    As your article suggests, the only way to find great stocks is to search for them. I bought LL when it was in the $14-17 range, held it for awhile, saw nothing promising happening and got out of it. Later, I see this stock, teetering on the edge of financial collapse, has shot up into the twenties, then thirties, now forties. I would sure as hell like to know how they managed that when no one was building and money was tight. In California Home Depot and Lowes pretty much have the market covered and building goes on year-round. So what I would like to know is HOW LL managed to pull off this feat of going from near collapse to its high current valuation. To me -- and I come from four generations of builders on one side of my family and Pultizer prize winning writers on the other side -- the LL rise to fame has been suspicious from the start, and each time it broke into a new decade of pricing, I thought, surely this cannot stand. It'll collapse soon -- but never did. So explain this rags to riches story here. I would really like to know, because nothing I saw told me this stock was anything like it was touted to be.

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