Has Cosan 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 Cosan (NYS: CZZ) 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 Cosan.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||50%||Pass|
|1-Year Revenue Growth > 12%||22.1%||Pass|
|Margins||Gross Margin > 35%||15.5%||Fail|
|Net Margin > 15%||7.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||46.4%||Pass|
|Current Ratio > 1.3||1.96||Pass|
|Opportunities||Return on Equity > 15%||35.1%||Pass|
|Valuation||Normalized P/E < 20||6.80||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||7 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Cosan paid its first dividend in Aug. 2010. Total score = number of passes.
When we looked at Cosan last year, it had the same score of 7. But the company has made impressive moves to cut its debt, and some small improvement in its margins has made a big difference on the bottom line.
Cosan is a Brazilian company that produces sugar. That gives it two attractive but totally different businesses: its refined sugar and related products tap into the same emerging consumer markets that AmBev (NYS: ABV) and Brasil Foods (NYS: BRFS) have found to be profit opportunities, but it also produces sugar-based ethanol.
With Brazilian markets having seen significant drops this year on fears of an overheating economy, the ethanol segment is getting more attention. In the U.S., corn-based ethanol has meant tax credits for domestic refiners Sunoco (NYS: SUN) and Valero (NYS: VLO) as well as ethanol producer Archer Daniels Midland (NYS: ADM) while sticking foreign producers like Cosan with a big import tax. But lately, that subsidy has come under fire over the inefficiency of corn ethanol compared to sugar.
In the end, free markets should prevail, and that will play up Cosan's sugar ethanol business -- especially if energy prices remain high. Meanwhile, with the possibility of a Brazilian slowdown, investors may well get an even bigger bargain on Cosan shares than ever. Cosan may not be perfect, but it represents a great value at today's prices.
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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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