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 SKECHERS
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 SKECHERS.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 9.6% | Fail |
| 1-Year Revenue Growth > 12% | (8.3%) | Fail | |
| Margins | Gross Margin > 35% | 39.3% | Pass |
| Net Margin > 15% | (0.4%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 14.7% | Pass |
| Current Ratio > 1.3 | 3.66 | Pass | |
| Opportunities | Return on Equity > 15% | (0.7%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 9 |
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 footwear maker has seen its score hit the floor, falling by three points. Plunging sales and a big drop in margins and returns on equity are responsible for the drop.
Footwear is a notoriously mercurial industry. While shoe leader Nike
For SKECHERS, the big problem that the company faced last year was an FTC investigation into advertising claims about the company's highly successful Shape-up line of toning fitness shoes. With competitor Reebok having had to pay a $25 million fine, SKECHERS could face a similar hit -- or an even bigger one, given its larger share of the toning shoe market.
Right now, SKECHERS doesn't look like it'll reach perfection anytime soon. But if the company can emerge from the near-demise of its toning shoes to recapture some of its lost growth, then the stock's price is certainly right for a rebound.
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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