Has Scotts Miracle-Gro 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 Scotts Miracle-Gro (NYS: SMG) 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 Scotts Miracle-Gro.
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%
3 out of 10
Since we looked at Scotts Miracle-Gro last year, the company has seen its score cut in half. The stock hasn't been able to break even, and falling returns on equity and earnings were responsible for most of the point losses.
Scotts Miracle-Gro shows exactly how big a divide there is between the agricultural industry and the consumer goods sector right now. In agriculture, farmers are clamoring for fertilizer products from Terra Nitrogen (NYS: TNH) , CVR Partners (NYS: UAN) , and PotashCorp (NYS: POT) in order to try to boost their crop yields and take advantage of high prices for many farm products. Yet Scotts, which arguably packages very similar products into a form that consumers use for domestic purposes like lawns and gardens, has suffered from weakness generally throughout the economy and specifically in housing.
Scotts has also had some bad luck over the past year. Late last year, its results suffered as terrible weather that included Hurricane Irene really hurt its earnings and forced it to reduce its outlook for the entire year. More recently, the same thing happened this past spring, as bad weather in Europe contributed to an overall poor sales environment for the company.
About a month ago, Scotts found out that it would have to pay $12.5 million in fines and penalties. The company put insecticides in bird food products, which ran afoul of EPA regulations and federal law. Given that Scotts' products are tailored for residential use, the issue had the potential of causing a lot of damage to the company's brand.
Scotts could have a tough time improving in the near future. Margins are tough on consumer products, and it will take work for the company to cut its debt and try to raise returns on equity. For now, you're better off looking elsewhere if you're seeking 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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The article Has Scotts Miracle-Gro 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 buying shares of Scotts Miracle-Gro. 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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