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:
What We Want to See
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.
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.