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 Movado Group (NYSE: MOV ) 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 Movado Group.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(2.6%)||Fail|
|1-Year Revenue Growth > 12%||22.5%||Pass|
|Margins||Gross Margin > 35%||54.8%||Pass|
|Net Margin > 15%||6.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||5.01||Pass|
|Opportunities||Return on Equity > 15%||8.7%||Fail|
|Valuation||Normalized P/E < 20||29.63||Fail|
|Dividends||Current Yield > 2%||0.5%||Fail|
|5-Year Dividend Growth > 10%||(12.9%)||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With just four points, Movado Group doesn't look like its business is as reliable as its watches. But the stock has done well, and the watchmaker got some good news recently that could indicate that things are looking up.
Retail has been a tale of two markets lately. While mid-range retailers have struggled, luxury companies have done reasonably well. This is especially true in the watch space, where Fossil (Nasdaq: FOSL ) not only has seen its stock soar so far in 2012 but also has managed to hold its gross margins steady even in the face of rising costs. Even among more fashion-conscious choices, Michael Kors (NYSE: KORS ) has roared out of its IPO gate in the past six months with blockbuster results, due largely from its sales of watches and other accessories. Movado hasn't been left out of the race, with solid sales growth as well.
One long-term threat to Movado comes from its licensing relationships. Movado makes watches for Coach (NYSE: COH ) and other premium brands via licensing agreements that periodically have to be renewed. If retailers balk or want to move to another provider, then Movado could lose out.
Earlier this week, Movado posted strong earnings results for its fourth quarter. With sales up more than 20%, the company was able to both raise its regular dividend and declare a one-time special dividend of $0.50 per share.
For Movado to keep making progress, it needs to sustain its growth while preferably seeing its shares correct to cheaper levels. With dividend improvement coming, Movado could get shareholders a bit closer to perfection in the coming years.
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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