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 and then decide whether CF Industries (NYS: CF) 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.
Moneymaking 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 CF Industries.
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%
9 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at CF Industries last year, the company has kept its near-perfect score of 9. The stock has risen 30%, pushing its dividend yield down further even as the payout has stayed stable at current levels.
CF Industries has prospered greatly in the favorable economic environment for agriculture. With crop prices generally on the rise and farmers flush with cash, efforts to raise crop yields by buying fertilizer have lifted stocks across the industry.
But there's been a great divide among fertilizer companies lately. Phosphate producers PotashCorp (NYS: POT) and Mosaic (NYS: MOS) have faced headwinds from high mining costs. Yet nitrogen-based fertilizer specialists, including CVR Partners (NYS: UAN) , have done extremely well, because their input costs have been extremely low. For its part, CF Industries operates on both sides of the fertilizer fence, with its majority interest in Terra Nitrogen (NYS: TNH) having been a big part of its success lately.
This year's drought in the U.S. temporarily hit CF and its nitrogen-producing peers, as farmers gave up on their crops and low-priced imports flooded the market. But prospects for CF look even better for next year, as the drought raises crop prices, especially for corn, and makes producers more likely to spend up for fertilizer in 2013.
For CF to improve, it needs to focus on boosting its dividend. That's the last obstacle standing in CF's path toward perfection, and that's why I've stuck with my bullish CAPScall on the stock, which has delivered 18 points of outperformance for me over the past year.
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 CF Industries Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.