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 J.C. Penney
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 J.C. Penney.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (1.2%) | Fail |
| 1-Year Revenue Growth > 12% | 1% | Fail | |
| Margins | Gross Margin > 35% | 39% | Pass |
| Net Margin > 15% | 2.2% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 65.2% | Fail |
| Current Ratio > 1.3 | 2.11 | Pass | |
| Opportunities | Return on Equity > 15% | 7.9% | Fail |
| Valuation | Normalized P/E < 20 | 20.05 | Fail |
| Dividends | Current Yield > 2% | 2.3% | Pass |
| 5-Year Dividend Growth > 10% | 7.6% | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With only three points, J.C. Penney isn't ringing up a perfect score for investors. The retailer has gone through a long period of rebuilding, but some interesting developments may have this turnaround story revving into high gear soon.
The recession has been especially tough on retail stocks, and few have taken bigger hits than Penney. Both high-end stores like Tiffany
But not everyone thinks that Penney shares are a lost cause. Last summer, activist investor Bill Ackman started building what would eventually become a substantial position in Penney. Although some initially believed Ackman was simply trying to unlock the value of Penney's real estate holdings, it's becoming clear that he now aims to return the company's retail business to its full potential.
Just earlier this week, Penney made what could potentially be a game-changing announcement: that Apple
Shareholders are excited that management changes could help resurrect the stock from its doldrums. That's possible, but even if Johnson is successful, it'll be a long time before Penney starts looking like a perfect stock.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
