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 Nordstrom
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 Nordstrom.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.5%||Fail|
|1-Year Revenue Growth > 12%||11.7%||Fail|
|Margins||Gross Margin > 35%||37.3%||Pass|
|Net Margin > 15%||6.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||174.9%||Fail|
|Current Ratio > 1.3||1.91||Pass|
|Opportunities||Return on Equity > 15%||36%||Pass|
|Valuation||Normalized P/E < 20||15.84||Pass|
|Dividends||Current Yield > 2%||1.8%||Fail|
|5-Year Dividend Growth > 10%||17.3%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Nordstrom last year, the high-end retailer has lost a point. Sales growth over the past year slowed just enough to fail our test, yet the bigger concern is a debt level that continues to rise as a percentage of equity.
Nordstrom stands out from the crowd of luxury retailers because of its strong customer loyalty. At a talk at Fool HQ last year, Whole Foods CEO John Mackey called out Nordstrom and Southwest Airlines
But Nordstrom doesn't take those customers for granted, instead seeking to deliver hot new fashions to keep up with the times. A few years ago, the company hired a product manager from lululemon athletica
The big question for Nordstrom is whether luxury retail can keep up its strength. Both Tiffany
For Nordstrom, short-term perfection isn't as important as maintaining its huge reputation as an extraordinary high-end retailer. From year to year, the stock may move in and out of favor, but over the long haul, the company treats both customers and shareholders right.
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.
If you're trying to find your way to a prosperous retirement, look no further. Learn more about the best investments to help you retire by accepting my invitation to receive the Fool's latest special report 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 Nordstrom 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. The Motley Fool owns shares of lululemon athletica and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Williams-Sonoma, Whole Foods Market, Southwest Airlines, and lululemon athletica. 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.