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.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||15.7%||Pass|
|1-year revenue growth > 12%||16.4%||Pass|
|Margins||Gross margin > 35%||56.0%||Pass|
|Net margin > 15%||11.2%||Fail|
|Balance Sheet||Debt to equity < 50%||1.8%||Pass|
|Current ratio > 1.3||3.90||Pass|
|Opportunities||Return on equity > 15%||28.7%||Pass|
|Valuation||Normalized P/E < 20||19.29||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Fossil last year, the company has gained a point, as its valuation has dropped considerably. A big plunge in the stock earlier this year has investors somewhat nervous, but the watchmaker's prospects appear to be rebounding.
Fossil makes a variety of high-end fashion accessories, including watches. The company not only makes products under its own name but also has partnerships with other companies, such as Michael Kors (NYSE: KORS ) , to make watches branded with others' names.
Back in May, Fossil shares plunged after the company said that it expected lower earnings for the year, based largely on tough conditions in the European economy. Even though the retailer pointed to its acquisition of fellow watchmaker Skagen and potential growth in Asia, investors weren't impressed, and the stock dropped nearly 40%. Moreover, the news rippled across the industry, with rival PVH (NYSE: PVH ) also falling sharply on the news.
But last week, Fossil validated bullish investors, sending shares soaring by 30% after reporting strong earnings for the second quarter. Although Europe remains a threat, Fossil beat earnings estimates by $0.14 per share and ramped up its guidance for the rest of 2012. At least in the company's eyes, the worst is over for Fossil, and investors in fellow luxury brands Coach (NYSE: COH ) and Movado (NYSE: MOV ) also gained ground in sympathy.
For Fossil to keep improving, it needs to get past European worries and simply focus on growing its business. Given its past success, Fossil is in great position to get even closer to perfection in the years ahead.
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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