Is Cal-Maine 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 Cal-Maine (NAS: CALM) 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 Cal-Maine.
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%
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 (NYS: TNH) and PotashCorp (NYS: POT) . But it's bad news for food producers that need feed grain. In the chicken segment, Sanderson Farms (NAS: SAFM) , Tyson Foods (NYS: TSN) , and Pilgrim's Pride (NYS: 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 (NYS: 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 the middle 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.
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 this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of Cal-Maine 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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