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 Pilgrim's Pride (NYS: PPC) 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 Pilgrim's.
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%
2 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With just two points, Pilgrim's Pride hasn't cooked up great results lately. The company has struggled in a difficult market environment for chicken.
Pilgrim's specializes in poultry products. That has been a tough market lately, as crop prices have surged in recent years. Just as Archer Daniels Midland (NYS: ADM) and ConAgra (NYS: CAG) feel the hurt in part from rising crop prices because they have higher costs in making their food products, so too do companies like egg-seller Cal-Maine Foods (NAS: CALM) and Pilgrim's suffer from higher feed costs.
At the same time, Pilgrim's has seen a glut of chicken put a lid on revenue, leading to severe margin compression. Although competitors Sanderson Farms (NAS: SAFM) , Tyson Foods (NYS: TSN) , and Smithfield Foods (NYS: SFD) all have faced similar problems, Tyson and Smithfield at least have more diverse product lines that include other meats such as pork and beef.
Earlier this week, Pilgrim's announced a rights offering, which would require current shareholders either to put up $4.50 per share to buy additional shares or accept dilution. Such offerings are arguably fairer to shareholders than simply doing a separate secondary offering, but it still indicates that Pilgrim's needs additional capital -- although the company hasn't yet announced exactly what it will do with the roughly $200 million in net proceeds.
Unfortunately for shareholders, it may be a while before the imbalances in the poultry industry correct themselves. Until costs fall or revenue rises, Pilgrim's has no chance of being 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 thisarticle was published Fool contributor Dan Caplinger doesn'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 a disclosure policy.
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