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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 Nordstrom (NYSE: JWN ) 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 Nordstrom.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.1%||fail|
|1-Year Revenue Growth > 12%||12.6%||pass|
|Margins||Gross Margin > 35%||36.2%||pass|
|Net Margin > 15%||5.9%||fail|
|Balance Sheet||Debt to Equity < 50%||150.3%||fail|
|Current Ratio > 1.3||2.43||pass|
|Opportunities||Return on Equity > 15%||33.5%||pass|
|Valuation||Normalized P/E < 20||16.73||pass|
|Dividends||Current Yield > 2%||1.9%||fail|
|5-Year Dividend Growth > 10%||19.1%||pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 6, Nordstrom makes a respectable showing. As counterintuitive as it may seem during slow economic times, Nordstrom and some of its fellow luxury-oriented retailers have held up as well or better than discounters aimed at helping struggling consumers make ends meet.
The story in retail is a tale of two markets. Discount retailers Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) have started to feel pressure in their quarterly results, as even low-priced offerings can't change the lack of disposable income among lower-end shoppers.
But at the other end of the spectrum, stores catering to the rich have done surprisingly well. Coach (NYSE: COH ) , for instance, has seen impressive gains for its luxury handbag business, with the company even being able to expand margins despite the slow economy.
As an all-purpose department store, Nordstrom can't match the margins of a specialty retailer like Coach. But it's doing better than Saks (NYSE: SKS ) , with much better profitability and returns on equity. Nordstrom also gives you a nice dividend, which falls just short of the 2% mark that would earn it its seventh point.
Of course, retail is notoriously cyclical, and Nordstrom has seen its share of ups and downs. That keeps it from being the perfect stock in many people's eyes, but if you think the recovery will accelerate in the months and years ahead, Nordstrom may be a good way to play that trend.
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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