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 hhgregg, Inc. (NYSE:HGG) 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:
Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that the 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 hhgregg, Inc. (NYSE:HGG).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 15.4% | Pass |
| 1-year revenue growth > 12% | 4.4% | Fail | |
| Margins | Gross margin > 35% | 29.2% | Fail |
| Net margin > 15% | 2.8% | Fail | |
| Balance sheet | Debt to equity < 50% | 0% | Pass |
| Current ratio > 1.3 | 1.54 | Pass | |
| Opportunities | Return on equity > 15% | 20.6% | Pass |
| Valuation | Normalized P/E < 20 | 12.56 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at hhgregg last year, the company hasn’t been able to regain the point it lost from 2011 to 2012. The stock has also struggled, falling 10% over the past year despite a pretty strong rebound in recent months.
Like most other electronics retailers, hhgregg, Inc. (NYSE:HGG) has been dealing with the strain of competition from online retail. Given the cost handicap of having brick-and-mortar stores, electronics retailers have suffered from margin pressure and an inability to compete solely on price.
Various ways to address those pressures have had mixed success. Appliances offer an additional draw, as ordering big items online is somewhat challenging. But neither hhgregg nor Sears Holdings Corporation (NASDAQ:SHLD), with its immensely popular Kenmore brand, has been able to use its appliance strength to make a big impact on results. For hhgregg, though, an attempt to focus on certain cities and offer high levels of customer service hasn’t produced good results. Comparable-store sales fell 9.7% during the holiday quarter on a 23% drop in net income.
For its part, industry leader Best Buy Co., Inc. (NYSE:BBY) has tried promoting its own online sales. It showed some success during the holiday season, with reports saying its website was among the top-traffic sites on Black Friday and Cyber Monday. Given its flat same-store sales, a change in strategy seems like the best way for Best Buy Co., Inc. (NYSE:BBY) to try to boost its results.
For hhgregg to improve, it needs to come up with a new strategy to boost sales and stand up to online competition — or join it by boosting its own online presence. The company’s recent move to implement a price-match guarantee that includes online retailers is only likely to threaten margins further, making it hard to imgagine hhgregg, Inc. (NYSE:HGG) moving closer to perfection anytime soon.
Keep searching
No stock is a sure thing, but some stocks are much more nearly 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 article Has hhgregg Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends hhgregg.
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