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 VF (NYS: VFC) 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 VF.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.3%||Fail|
|1-Year Revenue Growth > 12%||27.1%||Pass|
|Margins||Gross Margin > 35%||45.5%||Pass|
|Net Margin > 15%||9.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||56.5%||Fail|
|Current Ratio > 1.3||1.77||Pass|
|Opportunities||Return on Equity > 15%||21.1%||Pass|
|Valuation||Normalized P/E < 20||21.07||Fail|
|Dividends||Current Yield > 2%||2.0%||Pass|
|5-Year Dividend Growth > 10%||4.2%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at VF last year, the company has dropped by two points. Although revenue growth accelerated, a slowdown in dividend growth along with higher valuations and more debt contributed to the falling score, despite shareholders being quite happy with about a 40% rise in the stock in the past year.
VF isn't a household name, but many of its brands are. With North Face, Wrangler, and now Timberland among the brand-name products VF makes, the company supplies a wide range of retail clothing needs. In particular, its winter outdoor-sport-performance lines have tapped into the same trends that Under Armour (NYS: UA) has used to build up a strong presence in the athletic retail space.
But movements in the price of cotton have hamstrung a number of apparel makers and retailers. Both Aeropostale (NYS: ARO) and American Eagle Outfitters (NYS: AEO) suffered particularly hard in building expensive inventories that they had to sell at discount prices. After seeing cotton prices fall through much of last year, India recently clamped down on cotton exports again, potentially pushing worldwide prices higher. It's no accident that lululemon athletica (NAS: LULU) , one of the best-performing apparel retailers, relies largely on synthetics rather than cotton for its products.
From a recent performance standpoint, though, VF is doing fairly well. The company has produced bigger profit margin by building market share in the U.S. as well as going abroad to find growth in emerging markets. In addition, the mild winter actually supported VF's profits, even though some feared that a lack of cold weather would hold sales down.
For VF to improve, it needs to get its debt moving in the right direction and return to faster dividend growth. Incorporating the Timberland acquisition should allow VF to get closer to perfection in the years ahead.
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.
VF isn't the perfect stock, 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 VF 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 in this article. The Motley Fool owns shares of lululemon athletica, Under Armour, and Aeropostale. Motley Fool newsletter services have recommended buying shares of Under Armour and lululemon athletica, as well as creating a bear put spread position in Under Armour. 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.