Has SKECHERS Become 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 SKECHERS (NYSE: SKX  ) 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 SKECHERS.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.6% Fail
  1-Year Revenue Growth > 12% (8.3%) Fail
Margins Gross Margin > 35% 39.3% Pass
  Net Margin > 15% (0.4%) Fail
Balance Sheet Debt to Equity < 50% 14.7% Pass
  Current Ratio > 1.3 3.66 Pass
Opportunities Return on Equity > 15% (0.7%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 9

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

Since we looked at SKECHERS last year, the footwear maker has seen its score hit the floor, falling by three points. Plunging sales and a big drop in margins and returns on equity are responsible for the drop.

Footwear is a notoriously mercurial industry. While shoe leader Nike (NYSE: NKE  ) has managed to sustain its brand dominance over the years with a lot of spending on marketing, other shoe companies haven't been as lucky. Crocs (Nasdaq: CROX  ) has recently fallen back out of favor, having enjoyed a brief upsurge to rebound from its previous long-term decline after the allure of its namesake shoes faded. Deckers Outdoor (Nasdaq: DECK  ) enjoyed popular acclaim for its Ugg and Teva brands, but it also has seen shares lose much of their recent gains over the holiday season.

For SKECHERS, the big problem that the company faced last year was an FTC investigation into advertising claims about the company's highly successful Shape-up line of toning fitness shoes. With competitor Reebok having had to pay a $25 million fine, SKECHERS could face a similar hit -- or an even bigger one, given its larger share of the toning shoe market.

Right now, SKECHERS doesn't look like it'll reach perfection anytime soon. But if the company can emerge from the near-demise of its toning shoes to recapture some of its lost growth, then the stock's price is certainly right for a rebound.

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 out the best investments from the rest.

SKECHERS may not be the perfect stock, but we've got some more interesting prospects for the future. Take a look at the Fool's latest special report -- it's absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of SKECHERS and Nike, as well as creating a diagonal call position in Nike. 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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  • Report this Comment On February 01, 2012, at 3:45 PM, nattyzed wrote:

    Hmm. A strange mix for a scorecard. Although I would agree sales growth should be a top metric for any company, I doubt many companies could meet your threshold criteria of >15% annually over the past 5 years. What's the S&P average? Those that do very likely would not be paying dividends like larger, slower growth companies. Margins agreed. BS items agreed. ROE performs much like Net Margin so I would say those are duplicative measures in most cases. I would prefer EPS growth over your dividend metrics. For SKX the bottom line is the top line outlook. Looking backward only tells you what we know- they missed the turning point for toning shoes. Do they have the next trend dialed-in with Go Run?? Crowded stores suggests perhaps they do.

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