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 Coach
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 Coach.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.1%||Fail|
|1-Year Revenue Growth > 12%||13.2%||Pass|
|Margins||Gross Margin > 35%||72.3%||Pass|
|Net Margin > 15%||21.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||1.3%||Pass|
|Current Ratio > 1.3||2.34||Pass|
|Opportunities||Return on Equity > 15%||52.7%||Pass|
|Valuation||Normalized P/E < 20||25.28||Fail|
|Dividends||Current Yield > 2%||1.2%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Coach has only paid a dividend since 2009. Total score = number of passes.
Since we looked at Coach last year, the company has lost a point. A slowdown in the high-end retailer's long-term sales growth may be cause for concern, but Coach has plenty of growth opportunities left.
Retail is typically a low-margin business. But Coach has consistently found a path to generating strong margins, with a healthy balance sheet and strong cash flow to boot. Cashing in on the potential for international growth, Coach has made several moves to bolster its global presence, taking control of retail outlets in certain parts of Asia and expanding with new stores in Europe.
One trend that Coach has seen lately is that shoppers are choosing accessories over clothing purchases. That bodes well not just for Coach but also for Tiffany
One area where Coach needs to improve is in its dividend payout. Luxury-oriented peers Williams-Sonoma
In the end, the overall global economy will play a huge role in Coach's success. If growth in emerging markets continues, Coach will be right there to take advantage of it.
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.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Coach and Williams-Sonoma. 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.