Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does hhgregg fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell hhgregg's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at hhgregg's key statistics:


HGG Total Return Price Chart

Source: HGG Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

68.1%

Pass

Improving profit margin

(52.1%)

Fail

Free cash flow growth > Net income growth

5,190% vs. 60.6%

Pass

Improving EPS

60.3%

Pass

Stock growth (+ 15%) < EPS growth

(42.9%) vs. 60.3%

Pass

Source: YCharts. * Period begins at end of Q4 2009.

HGG Return on Equity Chart

Source: HGG Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(23.4%)

Fail

Declining debt to equity

(100%)

Pass

Source: YCharts. * Period begins at end of Q4 2009.

How we got here and where we're going
With the exception of a weaker profit margin, hhgregg puts forth a surprisingly strong performance for such a hated stock. Five out of seven passing grades is nothing to sneeze at, but with a share price nearly cut in half over the last three years, we really should ask: Is the market wrong, or are these numbers completely meaningless for the future? Let's dig a little deeper to find out.

Although hhgregg's three-year performance has been decidedly underwhelming, it's joined fellow brick-and-mortar electronics retailers Best Buy and RadioShack in a bit of a 2013 rebound. None of these companies has actually shown progress -- in fact, all three suffered same-store sales declines, and hhgregg's took the worst fall, with its similar "comparable-store" metric down 8.3% for the holiday quarter. Since Best Buy's same-store results were essentially flat domestically, hhgregg investors ought to be seriously concerned about its long-term viability in a shrinking sector. Despite this threat, hhgregg's shares were already moving higher during the actual holiday season, particularly after a November earnings report sent shares spiking.

However, there's one obvious reason to appreciate hhgregg in spite of its flaws: It's still profitable. Recent earnings reports from Best Buy, RadioShack, and specialty retailer GameStop all took floundering shares from value to value trap territory, and even prior to those reports, all posted higher valuations than hhgregg:

HGG PE Ratio TTM Chart

Source: HGG P/E Ratio TTM data by YCharts.

Conn's doesn't look good on this chart, so I left it out, but the gist is that it's been inconsistently profitable and is currently more than three times as highly valued as hhgregg, even though analysts project similar growth for both companies over the next five years. The only real advantage Conn's has is a better one-year forward growth rate, but even that only pulls its forward P/E roughly in line with hhgregg's 14 to 16.

The sad fact is that this entire sector of the economy may have little reason to exist as it's currently constituted. You can buy virtually anything found at Best Buy, RadioShack, GameStop, or Conn's online (whether on a certain Bezos-led e-retailer or not), and most of these retailers haven't shown that they can claim a niche valuable enough to justify investor optimism. Conn's has a bit more investor appeal in its big-ticket diversity, but there may be room in the market for the appliance-centric hhgregg -- if it can attract customers. Its latest earnings report shows that this remains an uphill battle.

Putting the pieces together
Today, hhgregg has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

The brick-and-mortar versus e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

Keep track of hhgregg by adding it to your free stock Watchlist.

The article Is hhgregg's Stock Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology. The Motley Fool recommends hhgregg, and owns shares of GameStop and RadioShack. 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.

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


Increase your money and finance knowledge from home

Asset Allocation

Learn the most important step in structuring an investment portfolio.

View Course »

Understanding Stock Market Indexes

What does it mean when people say "the market is up 2%"?

View Course »

Add a Comment

*0 / 3000 Character Maximum