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 Chico's FAS (NYS: CHS) 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 Chico's FAS.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

6.7%

Fail

 

1-Year Revenue Growth > 12%

17.3%

Pass

Margins

Gross Margin > 35%

55.8%

Pass

 

Net Margin > 15%

6.6%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

2.06

Pass

Opportunities

Return on Equity > 15%

14.9%

Fail

Valuation

Normalized P/E < 20

18.67

Pass

Dividends

Current Yield > 2%

1.1%

Fail

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

5 out of 9

Source: S&P Capital IQ. NM = not meaningful; Chico's started paying a dividend in March 2010. Total score = number of passes.

Since we looked at Chico's FAS last year, the company gained back one of the two points it lost from 2010 to 2011. The stock has been an even nicer surprise for investors, rising about 50% in the past year.

The women's apparel industry has faced substantial challenges for a long time now. Talbots sold itself to a private equity firm earlier this year, and Christopher & Banks (NYS: CBK) and Coldwater Creek (NAS: CWTR) have had to struggle just to keep their heads above water.

But for its part, Chico's has bucked the trend and posted some good numbers. Early in 2012, the company forecast strong revenue as well as cost-cutting measures that would help it boost its bottom line. Since then, Chico's has largely delivered on that promise, posting estimate-topping earnings in both its April and July quarters.

In large part, Chico's owes its success simply to rediscovering its customers' needs. Like rival Ann's (NYS: ANN) Ann Taylor stores, Chico's has avoided making fashion mistakes lately, making it easier to avoid discounting and keep margins relatively high. Ascena Group's (NAS: ASNA) acquisition of Charming Shoppes and its Lane Bryant chain represent a potential competitive threat, but Chico's still has a loyal following among customers.

For Chico's to improve, it needs to sustain and build on recent revenue growth and work on pushing its return on equity up just a bit. Retail margins may never be perfect, but Chico's has room to keep running in the years to come.

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 the best investments from the rest.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.

Click here to add Chico's FAS to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Chico's FAS Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Ascena Retail Group. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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