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 Flowers Foods (NYS: FLO) 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 Flowers Foods.
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: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of 6, Flowers doesn't entirely come up roses, but it's not stinking up the joint either. The bakery specialist has been hit hard by rising prices in the food industry.
Flowers makes bread, rolls, and tortillas for sale through grocery stores as well as wholesale foodservice customers. In an increasingly scary environment for high-growth stocks, Flowers is in a consumer staples business that looks attractive to those seeking reasonable defensive plays for a potential slowdown.
In addition, Flowers has rewarded long-term shareholders with consistent dividend increases. Its dividend growth over the past five years puts other food companies like General Mills (NYS: GIS) and J.M. Smucker (NYS: SJM) to shame.
Until very recently, the stock had moved almost straight up in recent months. But earlier this week, Flowers released its latest earnings report, which disappointed investors and sent shares careening downward. Although revenue rose 6%, the company missed income estimates by a wide margin because of rising food costs. Competitors ConAgra (NYS: CAG) and Ralcorp (NYS: RAH) have also seen their input costs jump, but Ralcorp managed to match analyst expectations and ConAgra missed by only a penny, versus a nickel shortfall at Flowers.
Flowers has a lot going for it, including solid returns on equity. If it gets through what will hopefully be temporarily high food costs, Flowers could easy vault back up toward perfect status in the near future.
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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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Flowers Foods. 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 adisclosure policy.
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