Has Skechers 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 and then decide whether Skechers (SKX 2.81%) 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.
• Moneymaking 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 Skechers.

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Skechers last year, the company hasn't been able to earn back any of the three points it lost from 2011 to 2012. But the stock has done quite well, climbing about 40% over the past year as investors hope the worst for the company is over.

The biggest news for Skechers over the past year involved the aftermath of the toning-shoe craze, which was based on the idea that wearing certain types of shoes could help you lose weight, build muscle, and generally improve health. Competitors Crocs (CROX 0.84%) and Collective Brands (NYSE: PSS) as well as athletic-shoe specialists Reebok and Puma followed suit with their own versions of the shoes, but the Federal Trade Commission ended up calling out Skechers for what it called the shoe company's "unfounded claims" and settled with Skechers for $40 million for misleading advertising.

After it got its litigation uncertainty behind it, though, Skechers' stock soared. Even when the company posted a loss in the second quarter of 2012, it was a small enough loss to send shares up strongly, simply because expectations for the company had gotten so low. Now, analysts are getting more optimistic, with upgrades pointing to the potential for Skechers to earn a substantial profit this year.

The big question is whether Skechers can avoid the downward cycle that seems to plague shoemakers. Last year, Deckers Outdoor (DECK 2.37%) was on the outs, with its dependence on Uggs making it vulnerable when they fell out of style. But bulls believe that Skechers has broken that cycle, diversifying just like Crocs did and finding more sustainable growth.

For Skechers to improve, it needs to make its way back to profitability. With that appearing increasingly likely this year, Skechers could well make a move closer to perfection in the near future.

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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