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 Stage Stores (NYSE: SSI) 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 Stage Stores.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (0.5%) Fail
  1-Year Revenue Growth > 12% 2.8% Fail
Margins Gross Margin > 35% 27.2% Fail
  Net Margin > 15% 2.0% Fail
Balance Sheet Debt to Equity < 50% 12.0% Pass
  Current Ratio > 1.3 2.15 Pass
Opportunities Return on Equity > 15% 6.9% Fail
Valuation Normalized P/E < 20 18.65 Pass
Dividends Current Yield > 2% 2.2% Pass
  5-Year Dividend Growth > 10% 22.4% Pass
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Stage Stores last year, the company has improved by a point. Share-price weakness helped push the retailer's yield up above the 2% mark.

Stage Stores operates the specialty retail chains Bealls, Peebles, and Goody's. Although Ross Stores (Nasdaq: ROST) and TJX's (NYSE: TJX) TJ Maxx have had success building sales even in a tough economic environment, Stage Stores' chains have suffered from lagging revenue and tight margins.

Perhaps as a result, Stage Stores is going through some internal turmoil. Last week, CEO Andy Hall resigned, marking a disconcerting end to a tough month in which the retailer posted a disappointing outlook despite fairly impressive same-store sales numbers. With other high-level corporate shake-ups at Talbots (NYSE: TLB) and Avon Products (NYSE: AVP) occuring in response to subpar performance, investors have to wonder whether Hall's move reflects trouble ahead or is merely for reasons unrelated to business.

Nevertheless, Stage Stores has managed to reward shareholders with a 2%-plus dividend yield and substantial payout growth. That won't be enough to get the retailer to perfection, but it's a good sign for the company's future. If Stage Stores can take action to differentiate itself from other smaller retailers, I could easily see it making a run at a better score in the years to come.

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.

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

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.