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 Mead Johnson Nutrition (NYSE: MJN ) fits the bill.
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 Mead Johnson Nutrition.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.9%||Fail|
|1-Year Revenue Growth > 12%||17.1%||Pass|
|Margins||Gross Margin > 35%||63.8%||Pass|
|Net Margin > 15%||14.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||NM||NM|
|Current Ratio > 1.3||1.64||Pass|
|Opportunities||Return on Equity > 15%||NM||NM|
|Valuation||Normalized P/E < 20||31.44||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||3 out of 7|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Mead Johnson Nutrition had negative shareholder equity during the period and only started paying a dividend in July 2009. Total score = number of passes.
With only three points, Mead Johnson Nutrition doesn't look like the healthiest stock in the world. But the spun-off company behind the Enfamil brand baby formula was a great success in its 2009 IPO, and gaining independence from its pharma roots seems to have been a good move for investors.
Mead Johnson may be new as a stock, but it has a century-long history of making infant and child nutrition products. The company not only has solid profits, but also gives investors plenty of exposure to growing Latin American and Asian emerging markets, with more than 60% of its revenues coming from the two regions.
Mead Johnson used to be part of Bristol-Myers Squibb (NYSE: BMY ) . Two years ago, during the worst of the financial crisis, Mead Johnson went public to huge demand. The reception was so good that less than a year later, Bristol went ahead and did a share exchange offer with its own shareholders to get rid of the remaining 83% of Mead that it owned. Interestingly, Pfizer (NYSE: PFE ) has considered doing the same thing with its nutrition business.
Of course, Mead Johnson doesn't have the market to itself. Abbott Labs' (NYSE: ABT ) Abbott Nutrition division makes competing Similac products, while Nestle and Danone are also in the space. But Abbott suffered a setback last year when it had to do a Similac recall that cost the company an estimated $100 million in sales.
At a lofty valuation and without the shareholder equity that investors would like to see, Mead Johnson isn't perfect. But in a growth industry in emerging markets, the company looks well-poised to pick up some points in the coming years.
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.