Is Sears Holdings the Perfect Stock?

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 Sears Holdings (Nasdaq: SHLD  ) 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 Sears Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(4.2%)

Fail

 

1-Year Revenue Growth > 12%

(2.5%)

Fail

Margins

Gross Margin > 35%

26.9%

Fail

 

Net Margin > 15%

(0.4%)

Fail

Balance Sheet

Debt to Equity < 50%

45.9%

Pass

 

Current Ratio > 1.3

1.27

Fail

Opportunities

Return on Equity > 15%

(1.8%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

1 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Sears Holdings can only manage to score a single point. The retailer has been particularly weak even in a tough environment for the industry in general.

Sears is an iconic brand known to generations of shoppers, but as we've seen recently with Eastman Kodak (NYSE: EK  ) , even iconic brands are vulnerable to changing times. With both Sears and Kmart stores under its umbrella, Sears Holdings seems like it should have positive exposure both to discount and mid-range retail.

But despite famous investor Eddie Lampert's success with investments in AutoZone (NYSE: AZO  ) , AutoNation (NYSE: AN  ) , and CIT Group (NYSE: CIT  ) , he's had difficulty getting Sears turned around. Although he initially saw the value of the company's real estate as a significant asset, Lampert hasn't been able to fight against the headwinds of negative sentiment toward the company's retail concepts. Unlike Target (NYSE: TGT  ) and Kohl's (NYSE: KSS  ) , Sears has seen revenue fall over the past five years.

Betting against Sears, however, has its own dangers. Yesterday, the stock rose as much as 11% on no apparent news, and Fool contributor Sean Williams suggested that the company's huge short interest may have played a role in the move. With a huge portion of the company's float sold short, even the slightest event can trigger a short squeeze that pushes the stock higher.

For long-term investors, however, none of this changes the fact that Sears Holdings still hasn't figured out how to stay relevant in today's retail world. Until the company can manufacture a turnaround, Sears Holdings isn't going to become a perfect stock.

Keep searching
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 the best investments from the rest.

Click here to add Sears Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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