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 and then decide whether Ross Stores 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.
  • Moneymaking 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 Ross Stores.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

9.5%

Fail

 

1-year revenue growth > 12%

12%

Pass

Margins

Gross margin > 35%

27.7%

Fail

 

Net margin > 15%

7.9%

Fail

Balance sheet

Debt to equity < 50%

8.8%

Pass

 

Current ratio > 1.3

1.47

Pass

Opportunities

Return on equity > 15%

47.2%

Pass

Valuation

Normalized P/E < 20

18.31

Pass

Dividends

Current yield > 2%

0.9%

Fail

 

5-year dividend growth > 10%

30.1%

Pass

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Ross Stores last year, the company has gained a point, finally getting its revenue growth high enough. The stock has done quite well, rising nearly 20% over the past year, despite having been up much further last summer before a substantial drop.

Ross Stores has continued to benefit from its ability to thread the needle between offering value to discount-seeking customers and serving up popular fashions. Using a similar off-price brand-name retail model to that of rival TJX and its TJ Maxx stores, Ross has fought back against the inexorable pull of Amazon.com's online retail empire by offering better prices in many cases to go with its tactile shopping experience. Ross has even managed to post better margins and sales growth than TJX recently.

One of the best things about Ross is that because it already discounts its merchandise, it already carries a value perception without cutting its prices further. By contrast, Kohl's had to cut its outlook last month because it had to make deep discounts late in the holiday season -- something that's an ever-present danger for just about every retailer.

Just last week, Ross boosted its dividend by 21% and raised its earnings guidance for its just-ended fiscal quarter. With a big buyback program also accompanying the higher payout, Ross is catering to its shareholders as well as its customers.

For Ross to improve, it needs to focus on continuing to boost its dividend with a goal of getting it to 2%. That could take a while, but given the retailer's fundamentals, it's not unreasonable to expect Ross to get closer to perfection in the years ahead.

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.

Even though Ross has done a good job of fighting against Amazon.com, everyone knows that the online giant is the big bad wolf in the retail world right now. Does that make Amazon a better buy than Ross? Find out in our premium research report on Amazon, which provides both reasons to buy and reasons to sell Amazon. Our report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.

Click here to add Ross Stores to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Ross Stores Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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