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 Buckle
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 Buckle.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 14.9% | Fail |
| 1-Year Revenue Growth > 12% | 11.9% | Fail | |
| Margins | Gross Margin > 35% | 49.7% | Pass |
| Net Margin > 15% | 14.2% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 0% | Pass |
| Current Ratio > 1.3 | 2.91 | Pass | |
| Opportunities | Return on Equity > 15% | 42.7% | Pass |
| Valuation | Normalized P/E < 20 | 14.31 | Pass |
| Dividends | Current Yield > 2% | 6.7%* | Pass |
| 5-Year Dividend Growth > 10% | 16.5% | Pass | |
| Total Score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes. * Includes special dividend.
Since we looked at Buckle last year, the company has picked up an additional point, as the company paid its third straight annual special dividend. But looking at its narrow misses in the other categories, Buckle could just as easily have been a perfect stock with a bit of improvement.
The retail space has been fraught with peril lately. Slow sales over the holiday season forced Abercrombie & Fitch
One of Buckle's key success traits is employee satisfaction. Just as Costco
Because of its success, Buckle has been able to buck the retail trend and expand at a measured but solid pace. Contrast that with Gap
For Buckle to keep improving, it needs to keep doing what it's been doing: Keeping customers happy and attracting new ones by word of mouth. That simple strategy could make Buckle a perfect stock before too long.
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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