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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Hormel (NYSE: HRL ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Hormel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.9%||Fail|
|1-Year Revenue Growth > 12%||12.8%||Pass|
|Margins||Gross Margin > 35%||17.6%||Fail|
|Net Margin > 15%||5.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||1.91||Pass|
|Opportunities||Return on Equity > 15%||18.4%||Pass|
|Valuation||Normalized P/E < 20||17.12||Pass|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||10.8%||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Hormel serves up six points, giving it a reasonable score on our 10-point scale. The food maker is well-known for its popular products but faces some headwinds in a changing economic climate.
Everyone knows Hormel for its Spam canned meat. But the company makes plenty of other processed foods as well, including deli meat, bacon, and canned chili.
As with industry peers Smithfield Foods (NYSE: SFD ) and Tyson (NYSE: TSN ) , Hormel faces the specter of rising food prices. Although more all-purpose food companies like General Mills (NYSE: GIS ) tend to be reluctant to pass on higher costs to consumers, meat producers have so much exposure to high prices for grain and take a direct hit. Hormel has already announced price hikes of around 3% on products from Spam to its canned soup.
In its most recent quarter, though, Hormel noted that while some of its input costs rose, its Jennie-O turkey products and some other refrigerated offerings actually saw falling costs. Those favorable results have vaulted shares of the company to new highs recently.
Looking forward, unless commodity price pressures start to drop, Hormel will keep having to do the balancing act of maintaining margins while keeping prices attractive to consumers. Hormel doesn't look like the perfect stock right now, but if it can keep doing the job, investors should continue to be pleased.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.