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 Mead Johnson Nutrition (NYS: MJN) 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 Mead Johnson Nutrition.
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 8
Source: S&P Capital IQ. NM = not meaningful due to negligible shareholder equity. Total score = number of passes. *Since first dividend in July 2009.
Since we looked at Mead Johnson Nutrition last year, the company has dropped a point, as revenue growth slowed in the past 12 months. Moreover, the stock has managed to eke out only a tiny gain in a generally up market over the past year.
Mead Johnson makes baby formula and other children's nutritional products. Its Enfamil brand is a familiar name among new parents, and the company has global scope.
But Mead Johnson suffered a big scare in the past year. Late last December, a 10-day-old infant died after taking Enfamil, and shares dropped sharply as a result as major retailers pulled formula from their shelves. After inspection, however, the FDA concluded that the batch of formula was free of bacteria and other harmful contents.
The longer-term threat to Mead Johnson, though, comes from strong competition. Earlier this year, Pfizer (NYS: PFE) sold its infant nutrition business to Nestle, which submitted a higher bid than a group that included Mead Johnson. Moreover, Abbott Labs (NYS: ABT) is splitting itself into two parts, with one part focusing directly on nutritional offerings that include Ensure, Pedialyte, and Similac, directly competing against Mead Johnson's products. Perrigo (NAS: PRGO) also makes store-brand formulas and other nutritional products.
For Mead Johnson to improve, it needs to keep struggling to find avenues for growth. Yet in a competitive atmosphere, that won't be easy. Unless it can find innovative ways to expand, Mead Johnson will have a tough time growing toward perfection.
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 the best investments from the rest.
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The article Has Mead Johnson Nutrition Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Abbott Labs. 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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