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 Target (NYS: TGT) 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 Target.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.3%||Fail|
|1-Year Revenue Growth > 12%||3.7%||Fail|
|Margins||Gross Margin > 35%||30.9%||Fail|
|Net Margin > 15%||4.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||110.5%||Fail|
|Current Ratio > 1.3||1.15||Fail|
|Opportunities||Return on Equity > 15%||18.7%||Pass|
|Valuation||Normalized P/E < 20||13.94||Pass|
|Dividends||Current Yield > 2%||2.1%||Pass|
|5-Year Dividend Growth > 10%||20.1%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Target last year, the retailer has kept its four-point score. The company continues to try to distinguish itself from competition with a variety of smart moves.
Target may be a discount retailer, but one of its best strategies has been to launch exclusive collections from well-known designers. Last month, its Jason Wu launch resulted in sellouts in just hours, repeating the huge demand the company saw last year for its Missoni line. In addition, it's working with Apple (NAS: AAPL) to create what amounts to mini-Apple stores within Target locations, further adding to the retailer's panache.
Another area where Target is reinventing itself is by adding groceries to its stores. Wal-Mart's (NYS: WMT) success with its supercenters undoubtedly contributed to Target's thought process, and even though margins from groceries are terrible, Target could see better repeat-customer numbers if it has things consumers need week in and week out.
Still, Target continues to face the same challenges other big-box retailers have. Amazon.com (NAS: AMZN) poses the biggest threat, although Target is now giving free shipping for online purchases to those who have its REDcard. Moreover, with Sears Holdings (NAS: SHLD) closing stores, Target is expanding into Canada, which has long been a Sears stronghold.
With razor-thin retail margins, Target will never achieve 10-point perfection. But with continuing attention to its image along with considerable dividend boosts, Target stands a good chance of making shareholders happy well into the future.
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.
Target isn't perfect yet, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add Target to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Amazon.com, Apple, and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Wal-Mart, as well as creating a diagonal call position in Wal-Mart and a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.