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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Skechers USA (NYSE: SKX ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Skechers.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.4%||fail|
|1-Year Revenue Growth > 12%||44.2%||pass|
|Margins||Gross Margin > 35%||47.2%||pass|
|Net Margin > 15%||8.3%||fail|
|Balance Sheet||Debt to Equity < 50%||3.7%||pass|
|Current Ratio > 1.3||3.39||pass|
|Opportunities||Return on Equity > 15%||19.9%||pass|
|Valuation||Normalized P/E < 20||6.90||pass|
|Dividends||Current Yield > 2%||0.0%||fail|
|5-Year Dividend Growth > 10%||0.0%||fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Skechers steps in with 6 points. The shoemaker has made a great entrance, but it still needs to prove it won't simply be the latest in a string of fad footwear stocks that have gone painfully wrong.
Skechers has enjoyed great success lately. Once focusing primarily on the teen market, the company hit pay dirt with its line of toning shoes. According to one analyst, that new product line brought in more than half of the company's sales last year, helped by the fact that shoe giant Nike (NYSE: NKE ) has largely ignored the toning shoe niche.
But that success also has some investors wondering if Skechers is setting the stage for its own demise. Crocs (Nasdaq: CROX ) went through a similar phase of huge popularity for its shoes, but then had to endure the fad's inevitable cooling, sending its stock skidding. Similarly, Heelys and its roller-shoes pushed shares through the roof in 2007; the stock is 90% lower today.
What Skechers has going for it is that uncertainty about its future is already priced into the stock. Its valuations are much cheaper than competitors Deckers Outdoor (Nasdaq: DECK ) and Timberland (NYSE: TBL ) -- particularly surprising in the case of Timberland, whose financial metrics aren't as strong. Even if its fad sales fade, Skechers's stock doesn't have far to fall.
Skechers is far from a sure thing. But many companies never get as far as Skechers already has. If the company can keep moving in the right direction, it might be the perfect stock someday.
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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