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 Tiffany (NYSE: TIF) 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 a company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks 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 normalised figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a cheque to shareholders every three months can’t be beaten. 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 Tiffany.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.0%||Fail|
|1-Year Revenue Growth > 12%||15.2%||Pass|
|Margins||Gross Margin > 35%||58.8%||Pass|
|Net Margin > 15%||11.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||35.4%||Pass|
|Current Ratio > 1.3||4.30||Pass|
|Opportunities||Return on Equity > 15%||18.9%||Pass|
|Valuation||Normalized P/E < 20||16.04||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||19.3%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Tiffany last year, the company has boosted its score by two points. The retailer’s shares have dropped by about 25%, bringing its valuation down and helping to increase its dividend.
Tiffany has benefited from a strange phenomenon over the past several years. Even during the recession, luxury retailers did relatively well as their high-end clientele weren’t hurt as badly by tough times as the general public. Moreover, as signs of a stronger recovery appeared, Tiffany was among those best positioned to reap rewards. Similar strength from fellow accessory seller Coach (NYSE: COH) and high-end sports apparel retailer lululemon athletica (Nasdaq: LULU) supports the hypothesis, as both companies appeal to wealthier customers who still retain discretionary income to spend on pricey purchases.
But things haven’t gone as well for Tiffany lately. The retailer delivered somewhat weak holiday results, calling the resilience of rich shoppers into question. More recently, renewed concerns about Europe have put a wrench in Tiffany’s growth story going forward. If Europe slips back into recession, it could bring the rest of the world with it — and clamp down on revenue for Tiffany.
Moreover, Tiffany faces competition from Michael Kors (NYSE: KORS), which has latched onto the trend toward fashion accessories with its broader collection aimed at all segments of the market. Relying on the high end serves Tiffany well in good times but leaves it vulnerable to competitors like Kors when the economy isn’t as strong.
For Tiffany to improve, it needs to find ways to reawaken growth and boost its margins. Given high raw material prices for precious metals and jewelry and slowing growth in formerly hot emerging markets, it could be a tall order for Tiffany to grab those final two points.
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.
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A version of this article, written by Dan Caplinger, originally appeared on fool.com