Is Monsanto the Perfect Stock?

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 Monsanto (NYSE: MON  ) 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 Monsanto:

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10.8% fail
  1-Year Revenue Growth > 12% (10.4%) fail
Margins Gross Margin > 35% 48.4% pass
  Net Margin > 15% 10.6% fail
Balance Sheet Debt to Equity < 50% 20.8% pass
  Current Ratio > 1.3 2.00 pass
Opportunities Return on Equity > 15% 11% fail
Valuation Normalized P/E < 20 25.25 fail
Dividends Current Yield > 2% 2.3% pass
  5-Year Dividend Growth > 10% 25.9% pass
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Monsanto weighs in with a middle-of-the-road score of 5. But there's nothing average about what's been going on with the company lately.

Until last year, things looked great for the company. Revenue growth was strong, and returns on equity were steadily growing. Just like fellow agricultural stocks PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) , Monsanto's shares jumped to record highs during the commodity boom in 2008, doubling in a single year. The company's seed and herbicide businesses were tailor-made to help farmers benefiting from high crop prices. Its cooperative venture with Dow Chemical (NYSE: DOW  ) led to promising innovations in corn seeds.

Now, though, there's lots of uncertainty for the ag giant. Its big product, Roundup, is now open to low-priced generic competition from the likes of Syngenta (NYSE: SYT  ) and others, and it's certainly no longer the cash cow that it once was. A lawsuit from DuPont (NYSE: DD  ) alleges that Monsanto's license agreement amounts to a violation of antitrust laws.

Where Monsanto goes from here is uncertain. Despite all the pessimism, insiders have made significant share purchases lately. Monsanto is far from perfect, but it might be worth a closer look for risk-tolerant investors.

Keep searching
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.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Syngenta is a Motley Fool Global Gains selection. Motley Fool Options has recommended a synthetic long position on Monsanto, which is a former Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2010, at 11:54 AM, gilga wrote:

    Excellent analysis. I am saving this article as an example of a good method of stock evaluation.

  • Report this Comment On October 08, 2010, at 5:10 PM, plange01 wrote:

    the big hedge funds have moved out of mon as its sales begin to crumble due to its high prices in a recession. chinese companys are starting to sell a just as good of a producct for far less ...this one is a sell it does not pay to fight the big money.buying monsanto long is like shorting apple right now

  • Report this Comment On October 08, 2010, at 11:37 PM, prginww wrote:

    Sure - if you don't mind poisoning the planet to make a few bucks profit.

  • Report this Comment On March 17, 2011, at 4:00 PM, Arydberg wrote:

    But when the S**t hits the fan they will have more lawsuits than the asbestos companies. Too many have a undying hatred of Monsanto.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1326471, ~/Articles/ArticleHandler.aspx, 10/22/2014 11:51:12 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement