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 Cato
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 Cato.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2%||Fail|
|1-Year Revenue Growth > 12%||3.6%||Fail|
|Margins||Gross Margin > 35%||38.7%||Pass|
|Net Margin > 15%||6.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.68||Pass|
|Opportunities||Return on Equity > 15%||18.9%||Pass|
|Valuation||Normalized P/E < 20||13.14||Pass|
|Dividends||Current Yield > 2%||3.3%||Pass|
|5-Year Dividend Growth > 10%||7.3%||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, Cato may not be perfect, but it puts much of the retail industry to shame. Nevertheless, Cato faces many of the same challenges that less successful retailers have struggled with lately.
Cato is a specialty retailer selling women's fashions. Unlike competitors Talbots
But things aren't perfect even for Cato. Just yesterday, the retailer disappointed investors by reporting same-store sales that rose just 1% during the five weeks that ended last Friday. Even more concerning was company guidance suggesting that higher costs for materials and freight charges would continue to weigh on earnings.
Before yesterday, Cato's shares were trading at new all-time highs, despite trading at a reasonable multiple to earnings. The question is whether the bad report was a one-time blip or a sign of worse things to come. But with a dividend yield well above 3%, if you have to pick a retail stock for your portfolio, you could certainly do worse than Cato.
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. 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.