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 Cal-Maine
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 Cal-Maine.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-Year Annual Revenue Growth > 15% |
14.2% |
Fail |
|
1-Year Revenue Growth > 12% |
9.0% |
Fail |
|
|
Margins |
Gross Margin > 35% |
18.8% |
Fail |
|
Net Margin > 15% |
5.9% |
Fail |
|
|
Balance Sheet |
Debt to Equity < 50% |
20.3% |
Pass |
|
Current Ratio > 1.3 |
3.28 |
Pass |
|
|
Opportunities |
Return on Equity > 15% |
14.2% |
Fail |
|
Valuation |
Normalized P/E < 20 |
14.04 |
Pass |
|
Dividends |
Current Yield > 2% |
0.6% |
Fail |
|
5-Year Dividend Growth > 10% |
75.3% |
Pass |
|
|
Total Score |
4 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With four points, Cal-Maine does better than laying a goose egg, but it's definitely not perfect. The egg producer faces many of the same problems that companies throughout the food and agricultural industries are dealing with.
A big challenge that agricultural companies have had to overcome is the rising price of food. That's a positive for companies that help farmers increase production, such as fertilizer makers Terra Nitrogen
Similar dynamics have Cal-Maine feeling the heat of lower margins. Earlier this week, the company announced that profits fell 35% despite a big jump in sales. Without hedges of the sort that Smithfield Foods
Cal-Maine performed well during the last recession and could be a good play for investors expecting further turbulence in the market. But until feed prices moderate, it's not going to become a perfect stock.
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.
Click here to add Cal-Maine to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
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.
