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 Fossil (Nasdaq: FOSL ) 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 Fossil.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||15.9%||Pass|
|1-Year Revenue Growth > 12%||35.2%||Pass|
|Margins||Gross Margin > 35%||56.6%||Pass|
|Net Margin > 15%||11.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||0.9%||Pass|
|Current Ratio > 1.3||3.55||Pass|
|Opportunities||Return on Equity > 15%||28.1%||Pass|
|Valuation||Normalized P/E < 20||20.24||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Fossil gives shareholders something to watch with its score of six. The watchmaker has its business purring as smoothly as a precision timepiece, but investors recently seem to think crushing news is right around the corner.
The thought of Fossil watches may take you back to the 80s, but the company is stronger than ever. In addition to watches, Fossil offers accessories like jewelry, handbags, and sunglasses.
Fossil may seem like an odd pick for an economy that seems poised to return to recession. But like Guess? (NYSE: GES ) , Under Armour (NYSE: UA ) , and lululemon athletica (Nasdaq: LULU ) , Fossil maintains a high-status reputation that draws customers who aren't necessarily on the front lines of an economic downturn .
Perhaps most impressive is the fact that CEO Kosta Kartsotis not only has a 10% stake in the company but also refuses to take a salary. Growth has been steady though not outstanding, but just as Tiffany (NYSE: TIF ) and Coach (NYSE: COH ) have focused on Asia for growth prospects, Fossil expects international markets to keep it going even if the U.S. economy falters.
For its most recent quarter, Fossil reported 35% higher revenue with a consensus-beating profit of $0.80 per share. But with higher costs and taxes coming in the third quarter, Fossil cut its guidance, causing the stock to lose about a quarter of its value. Yet with favorable currency trends supporting its profits and stock repurchases, the stock may be a value play after the decline.
With no dividend, Fossil isn't yet a perfect stock. But its strong history should give you hope that it will someday reach perfection. For now, Fossil is definitely worth a second 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.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.