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 Bed Bath & Beyond (NASDAQ:BBBY) 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 Bed Bath & Beyond.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

7.6%

Fail

 

1-year revenue growth > 12%

10.5%

Fail

Margins

Gross margin > 35%

40.6%

Pass

 

Net margin > 15%

9.9%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

2.16

Pass

Opportunities

Return on equity > 15%

25.7%

Pass

Valuation

Normalized P/E < 20

13.26

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 10

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

Since we looked at Bed Bath & Beyond last year, the company hasn't been able to regain the point it lost from 2011 to 2012. The stock has also failed to perform well, dropping 5% over the past year.

When big-box competitor Linens 'n Things liquidated its stores and went to an all-online model, Bed Bath & Beyond became the leading large-format retail specialty chain for home furnishings. Yet while the company rode that position up to hit all-time highs in its stock price during the 2012 spring season, it has seen substantial struggles since.

In December, Bed Bath & Beyond lowered its guidance for its fourth-quarter and fiscal 2012 results that disappointed analysts. With earnings-per-share ranges well below consensus estimates, the home-furnishing company hasn't been able to capitalize on improving conditions to nearly the extent that rivals Pier 1 (NYSE:PIR) and Williams-Sonoma (NYSE:WSM) have. Pier 1 has engineered a huge turnaround after having flirted with being delisted from the New York Stock Exchange a few years ago, and Williams-Sonoma announced in January a substantial increase in its holiday revenue.

Seeds of a rebound for Bed Bath & Beyond may come from a much stronger housing market. With home sales rising sharply, new and existing homeowners will need more home furnishings, and as long as Bed Bath & Beyond can get its share of that business, it should be able to boost its high-margin sales and get the profit growth that investors want to see.

For Bed Bath & Beyond to get closer to perfection, it needs to focus on sales growth. Given its internal efficiency, getting customers in the door is the key driver for Bed Bath & Beyond's profitability in the long run.

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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