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 General Mills 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 General Mills.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
General Mills is a stalwart in the food industry. Although it's most famous for its breakfast cereals, the company has a wide array of offerings, including Yoplait yogurt, Progresso soups, and Totino's pizza.
Yet, General Mills and other premium food brands are under attack from private-label brands, which offer cheaper prices. Already, ConAgra's buyout of Ralcorp has boosted its presence in the private label arena. More importantly, grocery store chains see private-label brands as a way to boost margins, with SUPERVALU adding substantial presence in the area to try to keep its profits up. Even Whole Foods has added private-label brands, leveraging its own brand to sell premium products.
In response, General Mills is trying to modernize its lineups in order to keep up with the competition and keep its business exciting. Both General Mills and Kellogg have recently come up with competing breakfast shake products, with General Mills testing its BFast brand to go up against Kellogg's Breakfast To Go.
One reason General Mills' stock has risen is the interest in the food industry after Heinz received an acquisition bid. Investors clearly hope that General Mills might join the consolidation party, but further moves seem unlikely given current valuations.
For General Mills to improve, it needs to work on cleaning up its balance sheet. With solid dividends, General Mills would look even more attractive if it reduced its debt and thereby got a little closer to 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 out the best investments from the rest.
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The article Has General Mills Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Supervalu and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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