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 AgFeed Industries
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:
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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.
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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.
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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.
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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.
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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 AgFeed.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 99.1% | Pass |
| 1-Year Revenue Growth > 12% | 22.5% | Pass | |
| Margins | Gross Margin > 35% | 10.6% | Fail |
| Net Margin > 15% | (9.6%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 47.2% | Pass |
| Current Ratio > 1.3 | 3.85 | Pass | |
| Opportunities | Return on Equity > 15% | (13.8%) | Fail |
| Valuation | Normalized P/E < 20 | 55.59 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
AgFeed wrangles up a 4, leaving it short of perfection. Many investors see AgFeed as a dual play on China and the boom in agricultural commodity prices, but a closer look shows that it's not as well-placed to benefit from higher ag prices as other companies in the sector.
With food costs on the rise , agriculture-related stocks are in the spotlight. By producing fertilizers that help farmers get higher yields on their crops, CF Industries
AgFeed certainly has a similar history of revenue growth, but with its business focusing on animal nutrition and hog production, AgFeed sees the price of feed crops as a cost of doing business. So the company actually stands to gain when feed commodities go down in price -- as long as the revenue it can generate from its products doesn't fall along with its input costs.
AgFeed has also gotten caught up in the general hostility toward reverse mergers involving Chinese companies. Although fraudulent financials from other companies don't make every reverse-merger company a scam, investors are giving companies like AgFeed more scrutiny.
AgFeed shows the importance of going beyond a company's name to see what it really does before assuming that it's a good way to play a popular trend. In the long term, AgFeed has potential as China's middle-class emerges, but for now, it's not worth the detour from the pursuit of perfection.
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.
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