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 Monsanto (NYS: MON) 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 Monsanto.
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%
7 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Monsanto last year, the company picked up an extra point, extending its score-gain streak to two consecutive years. The stock has also performed impressively, rising about 25% over the past year.
Monsanto has capitalized on the rise of agriculture over the past several years. Just as rising crop prices have boosted farmers' bank accounts enough to lead to a big jump in sales of farm equipment at Deere (NYS: DE) , Monsanto has seen more interest in its products, which can help producers get better yields and improve their profits.
But agriculture stocks have gotten off to a rocky start as earnings season kicks off. A day after fertilizer company Mosaic (NYS: MOS) posted weak results with drops in revenue and net income of nearly 20%, Monsanto followed up with a net loss of $229 million, more than double the loss in its year-ago quarter. But as Fool analyst Taylor Muckerman noted last week, this is traditionally Monsanto's worst quarter, and more importantly, the company still showed a yield advantage in its seed compared to those of rivals DuPont (NYS: DD) and Dow Chemical (NYS: DOW) .
In the long run, this year's drought may help Monsanto. Although its genetically modified seeds are controversial, they withstood drought conditions better than conventional seeds. If climatic extremes become more commonplace, then Monsanto's technology will see its value increase.
For Monsanto to improve, it needs to focus on growing earnings at a fast-enough pace to justify its current valuation. If it can do that and keep raising its dividend, then Monsanto could keep on pushing toward perfection in the years ahead.
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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The article Has Monsanto Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended creating a synthetic covered call position on Monsanto. 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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