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 hhgregg
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 hhgregg.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||17.6%||Pass|
|1-Year Revenue Growth > 12%||34.2%||Pass|
|Margins||Gross Margin > 35%||30.1%||Fail|
|Net Margin > 15%||2.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||29.7%||Pass|
|Current Ratio > 1.3||1.92||Pass|
|Opportunities||Return on Equity > 15%||16.1%||Pass|
|Valuation||Normalized P/E < 20||12.75||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With six points, hhgregg makes an above-average showing, but the electronics retailer is struggling to remain relevant as pressure from online competitors ramps up.
When Circuit City went bankrupt, the news was good for hhgregg. Although most investors focused on Best Buy
Lately, though, the entire bricks-and-mortar electronics industry has come under attack. Amazon.com
To become perfect, hhgregg needs to show it can survive a down cycle for the electronics retail industry. If it can eat into Best Buy's big lead, then perfection might be a worthy goal down the road.
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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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 in this article. Amazon.com, Best Buy, and hhgregg are Motley Fool Stock Advisor choices. The Fool owns shares of Best Buy, which is also a Motley Fool Inside Value recommendation. 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.