Has Kohl's Become the Perfect Stock?

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 Kohl's (KSS 1.03%) 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 Kohl's.

Source: S&P Capital IQ. NM = not meaningful; Kohl's initiated its dividend in March 2011. Total score = number of passes.

Since we looked at Kohl's last year, the company has kept its five-point score. The stock also hasn't done much, putting in roughly flat performance over the past year.

In recent years, success in retail has depended largely on which segment of the population you aim to serve. Mid-priced department stores have had the biggest challenges, and despite having done reasonably well in last year's holiday season, Kohl's and similarly successful peers J.C. Penney (JCPN.Q) and Target (TGT 0.18%) faced higher costs of obtaining inventory. That led to Kohl's having to cut its forecast for 2012 earnings early this year.

Probably more than any other company, Kohl's has felt the impact of J.C. Penney's big transformation. Yet the biggest takeaway is that Kohl's continues to outperform its rival, with sales per square foot that exceed not only Penney but also higher-end Macy's (M 0.44%). Yet even as Dillard's (DDS 0.80%) has hit all-time highs, Kohl's stock has gone pretty much nowhere.

The reason may simply be that Kohl's hasn't gotten everything right. The need for substantial discounting has hurt revenue, as same-store sales in September fell 2.7%. Kohl's is hoping, though, that the holiday season will bail the company out, as it announced plans to hire more than 50,000 workers to cover the increased demand.

For Kohl's to improve, it needs to find ways to get its debt levels lower. Otherwise, given the low margins that retailers always struggle with, Kohl's is probably about as close to perfection as it should expect to get.

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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