Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Tyson Foods
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Tyson Foods.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 3.3% | Fail |
| 1-Year Revenue Growth > 12% | 11.2% | Fail | |
| Margins | Gross Margin > 35% | 8.7% | Fail |
| Net Margin > 15% | 3.0% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 43.4% | Pass |
| Current Ratio > 1.3 | 1.99 | Pass | |
| Opportunities | Return on Equity > 15% | 17.1% | Pass |
| Valuation | Normalized P/E < 20 | 7.41 | Pass |
| Dividends | Current Yield > 2% | 0.9% | Fail |
| 5-Year Dividend Growth > 10% | 0.0% | Fail | |
| Total Score | 4 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With four points, Tyson Foods doesn't lay a goose egg, but it isn't perfect either. The meat producer is facing challenges in the industry which could prove detrimental to the company's long-term health.
It's a tough environment for companies that sell products like chicken, beef, and pork. Because the price of feed has risen, it costs more for Tyson and its competitors to raise animals, which is squeezing already thin margins.
The logical thing for Tyson to do would be to cut production, thereby hopefully letting it pass on some of those higher costs to consumers. But in the chicken market, despite an acknowledged oversupply of chicken, neither Tyson, Sanderson Farms
One silver lining for Tyson comes from the recent disasters in Japan. Because Japanese meat companies were hit hard by the tragedy, Smithfield Foods
As long as high costs of feed crops persist, Tyson isn't going to reach perfection. Right now, the key is for Tyson to survive what's shaping up to be a nasty price war in the chicken market. If it can do that, then things may improve in the future.
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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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.
