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 Target (NYSE: TGT ) 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 Target.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | 3% | Fail |
| � | 1-year revenue growth > 12% | 4.9% | Fail |
Margins | Gross margin > 35% | 29.4% | Fail |
| � | Net margin > 15% | 4.1% | Fail |
Balance sheet | Debt to equity < 50% | 106.6% | Fail |
| � | Current ratio > 1.3 | 1.17 | Fail |
Opportunities | Return on equity > 15% | 18.5% | Pass |
Valuation | Normalized P/E < 20 | 15.80 | Pass |
Dividends | Current yield > 2% | 2.1% | Pass |
| � | 5-year dividend growth > 10% | 20.5% | Pass |
| � | � | � | � |
| � | Total score | � | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Target last year, the company has kept its four-point score for the third year in a row. The stock, though, has managed to climb higher, rising about 20% over the past year.
Target's success comes from straddling multiple segments of the retail industry. Although its prices offer a discount-retail feel, the company has collaborated with major fashion moguls to produce custom lines of merchandise that draw a lot of buzz and pull shoppers into its stores.
Yet Target is seeing competition on that innovative model. A recent partnership between Nordstrom (NYSE: JWN ) and online marketplace Etsy will bring unique products into Nordstrom stores, differentiating the upscale retailer and potentially attracting younger customers who are already familiar with Etsy.
Target is looking to greener pastures to try to find new growth. With a planned push into Canada, the company is hoping to take on Wal-Mart (NYSE: WMT ) on foreign soil. Wal-Mart has had substantial success in the Great White North, but Target hopes to take away some of the gains that Wal-Mart has gotten by opening more than 100 stores throughout the remainder of 2013.
Earlier this month, Target also turned to Canadian bank Toronto-Dominion (NYSE: TD ) in a deal to sell Target's lucrative consumer credit card business. TD Bank was willing to pay $5.7 billion for the business, with Target earnings nearly a $400 million profit on the transaction. Target will still have to service the card accounts, but the move allows Target to focus more on its retail operations.
For Target to improve, it needs to stay aware of competitive trends and seek to stay one step ahead of its rivals. Its best chance at getting closer to perfection is to work on improving its balance sheet, which is eminently doable if it can generate the growth it expects.
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.
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Click here to add Target to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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