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 Cal-Maine (Nasdaq: CALM ) fits the bill.
The quest for perfectionStocks 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.
- 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.
Factor
What We Want to See
Actual
Pass or Fail'
Growth5-Year Annual Revenue Growth > 15%
14.2%
Fail
' 1-Year Revenue Growth > 12%
9.0%
Fail
Margins
Gross Margin > 35%
18.8%
Fail
' Net Margin > 15%
5.9%
Fail
Balance Sheet
Debt to Equity < 50%
20.3%
Pass
' Current Ratio > 1.3
3.28
Pass
Opportunities
Return on Equity > 15%
14.2%
Fail
Valuation
Normalized P/E < 20
14.04
Pass
Dividends
Current Yield > 2%
0.6! %
Fail
' 5-Year Dividend Growth > 10%
75.3%
Pass
' ' ' ' ' Total Score
' 4 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With four points, Cal-Maine does better than laying a goose egg, but it's definitely not perfect. The egg producer faces many of the same problems that companies throughout the food and agricultural industries are dealing with.A big challenge that agricultural companies have had to overcome is the rising price of food. That's a positive for companies that help farmers increase production, such as fertilizer makers Terra Nitrogen (NYSE: TNH ) and PotashCorp (NYSE: POT ) . But it's bad news for food producers that need feed grain. In the chicken segment, Sanderson Farms (Nasdaq: SAFM ) , Tyson Foods (NYSE: TSN ) , and Pilgrim's Pride (NYSE: PPC ) have fought among themselves to maintain high production levels despite sagging demand.
Similar dynamics have Cal-Maine feeling the heat of lower margins. Earlier this week, the company announced that profits fell 35% despite a big jump in sales. Without hedges of the sort that Smithfield Foods (NYSE: SFD ) put in place, Cal-Maine had no choice but to cut its dividend. Even worse, CEO Dolph Baker expects no respite until at least t! he middl e of next year.
Cal-Maine performed well during the last recession and could be a good play for investors expecting further turbulence in the market. But until feed prices moderate, it's not going to become a perfect stock.
Keep searchingNo 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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