As I routinely do, I was recently searching for a hidden gem stock investment. In other words, I was trying to identify a preverbal diamond in the rough. As I was conducting my search, it suddenly occurred to me that if I wanted to find a jewel of an investment, I should look to where the most precious treasures would be found - so logically I "went to Jared." And in doing so, I discovered Signet Jewelers Ltd. (SIG), a stock that has soundly outperformed the stock market since 2009.

Since changing its stock market listing from the London to the New York Stock Exchange on September 11, 2008, Signet Jewelers Ltd. has been on a tear. Operating earnings growth has averaged almost 23% a year, and the stock price has risen from $8.67 on December 31, 2008 to $55.14 on the close of business on December 12, 2012. This has generated capital appreciation at a compounded annual rate of 59.7%, add in their modest dividend and annual shareholder returns have exceeded 60% per annum. The following earnings and price correlated FAST Graphs™ and accompanying performance table reveals these results. Yet in spite of this stellar performance, Signet's stock receives little to no coverage or attention from Wall Street.

Signet Jewelers Ltd A Branding Powerhouse

Signet is the largest specialty retail jeweler in the world. Since 2008, the company has been domiciled in Bermuda and their stock listed on the New York Stock Exchange. Signet dominates the specialty jewelry markets in both the United States and the United Kingdom. Much of this success can be attributed to their successful marketing and branding campaigns. See a woman smiling on TV and you almost immediately think "He went to Jared" and most everyone now knows that "Every Kiss, Begins with Kay."

However, although great taglines can capture and even captivate customer mind share, it takes a great product offering to convert that into sales and profits. Signet does a stellar job of creating attractive offerings to differentiate their jewelry stores from their competition. The Leo Diamond, marketed as the only diamond certified to be brighter, the Open Hearts Collection by Jane Seymour and the Le Vian Chocolate Diamond Collection are just a few of the successful branding initiatives that distinguish the Signet jewelry franchises from all the rest.

But most importantly, all of these successful marketing and branding programs are backed by extensive research based on mining their proprietary database of over 25 million jewelry purchasers. Catchy taglines backed by a quality array of enticing collections are major contributors to Signet's profitable growth and success. Additionally, this experience is enhanced by a highly trained and dedicated staff. Every Signet district manager and vice president has at one time operated a store. Therefore, Signet's highly trained staff of dedicated employees are motivated by the company's strong promote from within policy, which adds up to a great customer experience and a very profitable business model.

Moreover, the company has no debt on their balance sheet, and can be purchased today at a below market PE ratio of 13.1. In January of 2008 the company's gross margin was 10.6%, but as of January 2012 gross margin has increased to 38.3%. Net margin has increased from 5% to 8.7% over that same time frame. Signet's margins are significantly higher than major competitors such as Zale, and I believe is attributed to Signet's excellent control of costs. Additionally, Signet possesses one of the industry's most sophisticated management and inventory control systems in the industry.

As previously stated, Signet's operating performance has been exceptional since 2008. operating earnings growth has been 22.9%, and the company has no debt on the balance sheet. Their fiscal third quarter results they reported on November 20, 2012 shows the company is continuing its strong performance.

Furthermore, the recent acquisition of the Chicago-based outlet diamond chain, Ultra Stores, thereby establishing a larger foothold into the outlet store market is expected to be accretive to earnings by the fourth quarter of fiscal 2014. This is a rapidly growing channel that Signet's management believes will augment their long-term profitability.

Summary and Conclusions

Signet is a very strong jewelry retailer that is mostly being ignored regarding coverage and research. However, the company has generated excellent operating results, and the stock price has tracked those results since the company moved their listing to the New York Stock Exchange in 2008. However, it was the company's creative branding and marketing over the holiday season that attracted me to wanting to know more about the parent company. What I discovered was a very pleasant surprise.

Consequently, I believe that Signet represents a very attractive total return opportunity at its current quotation. The company is dominant in its industry; and it appears to be currently very reasonably priced by the market place. The dividend yield is light, but growing rapidly, while capital appreciation potential appears to be significantly above-average going forward. Signet's earnings yield is attractive at 7.8%. Recently the stock price has momentum and I calculate current fair value at approximately $64.00 per share, and a long-term target price out to fiscal year-end 2018 at $114 per share, implying a five-year compound return potential of approximately 16% per annum. Therefore, I rate it a short and long-term buy.

Disclosure: No position at the time of writing.