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 Mosaic
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 Mosaic.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 15.9% | Pass |
| 1-Year Revenue Growth > 12% | 44.6% | Pass | |
| Margins | Gross Margin > 35% | 32.0% | Fail |
| Net Margin > 15% | 25.3% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 6.7% | Pass |
| Current Ratio > 1.3 | 3.79 | Pass | |
| Opportunities | Return on Equity > 15% | 25.7% | Pass |
| Valuation | Normalized P/E < 20 | 13.36 | Pass |
| Dividends | Current Yield > 2% | 0.4% | Fail |
| 5-Year Dividend Growth > 10% | 0%* | Fail | |
|
|
|||
| Total Score | 7 out of 10 |
Source: S&P Capital IQ. *Change since instituting dividend in August 2008. Total score = number of passes.
Mosaic has made an incredible turnaround. When we looked at the fertilizer maker last year, it only managed to score two points. But huge sales and earnings growth have brought margins and returns on equity up while pushing earnings multiples down.
This time last year, everything had seemed to go wrong for Mosaic. The company's stock price had fallen dramatically during the summer of 2010 as the future of commodity prices had come into question again. Sales growth had stalled out, and it appeared that the stock might never regain its former glory from the commodity boom several years ago.
Since then, though, positive trends have emerged. Sales have climbed through the roof as food-crop prices remained high through much of the year. Although the proposed merger of BHP Billiton
Mosaic doesn't have a clear path to perfection, though. A slowdown in China could cause fertilizer prices to reverse course, which explains part of the decline that shares of Terra Nitrogen
For Mosaic to reach perfection, it needs to correct its outdated dividend policy and work further on improving its gross margins. But with macroeconomic factors in its favor, Mosaic has a chance to make further gains in the year ahead.
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 ."
