Has Monsanto Become the Perfect Stock?
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 Monsanto (NYS: MON) 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.
- 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 Monsanto.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
When we looked at Monsanto last year, it only scored five points. The seed and herbicide maker saw revenue jump in the past year, and improved returns on equity have offset a falling dividend yield that stems entirely from an increase in the company's stock price.
Monsanto has shown a strong recovery from some of the challenges that faced it in recent years. With its Roundup herbicide having to go up against generic competition, the company lost what had been a cash cow for the company, with gross profits falling by two-thirds since 2008. But Monsanto has made the most of the situation by choosing not to compete directly with generics.
At the same time, Monsanto's seeds business has seen solid gains. Just as fertilizer companies PotashCorp (NYS: POT) and Mosaic (NYS: MOS) have had their business pick up with the boom in crop prices, the seeds segment appears to be Monsanto's best bet for growth in the future.
Not everything is perfect for Monsanto, though. Recently, Western corn rootworms managed to defeat Monsanto-produced corn that the company specifically designed to resist them. That may open the doors for competitors DuPont (NYS: DD) and Syngenta (NYS: SYT) to take away market share if the company can't solve the problem quickly.
With growing world populations, food production will continue to be a crucial part of the global economy. Monsanto may not be perfect yet, but it's in the right place at the right time and has the opportunity to keep making money from a firmly entrenched trend.
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.
Click hereto add Monsanto to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Syngenta and creating a synthetic long position in Monsanto. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.