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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 Mosaic (NYSE: MOS ) 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 Mosaic.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||8.1%||fail|
|1-Year Revenue Growth > 12%||0.8%||fail|
|Margins||Gross Margin > 35%||26.4%||fail|
|Net Margin > 15%||13.7%||fail|
|Balance Sheet||Debt to Equity < 50%||14.8%||pass|
|Current Ratio > 1.3||3.45||pass|
|Opportunities||Return on Equity > 15%||11.6%||fail|
|Valuation||Normalized P/E < 20||32.76||fail|
|Dividends||Current Yield > 2%||0.3%||fail|
|5-Year Dividend Growth > 10%||0.0%*||fail|
|Total Score||2 out of 10|
Source: Capital IQ, a division of Standard and Poor's. * Change since instituting dividend in Aug. 2008. Total score = number of passes.
Mosaic's score of 2 is far from perfect. But it shows just how far this stock has fallen from the lofty heights it enjoyed just a couple of years ago.
In 2008, Mosaic was among a select group of fertilizer stocks enjoying an unprecedented bull run in commodities, including farm products. Higher prices meant higher demand for fertilizer, and Mosaic was enjoying triple-digit earnings revenue and 40% margin growth on healthy returns on equity.
Then the bottom fell out. Along with industry peers PotashCorp (NYSE: POT ) and Intrepid Potash (NYSE: IPI ) , Mosaic's growth came to an abrupt halt and reversed course. Just as falling commodity prices hurt Monsanto (NYSE: MON ) and other ag-dependent companies, so too did Mosaic's shares come falling down.
Now, though, the future is uncertain. Commodities prices are on the rise again, and BHP Billiton's buyout offer for PotashCorp has renewed investor interest in the industry.
Perhaps the most important lesson for Mosaic investors is that the company is in a cyclical industry punctuated by booms and busts. Right now, Mosaic might not look attractive. But if the boom times of 2008 return, Mosaic will be right there waiting for them.
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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