Has PotashCorp Become the Perfect Stock?

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 PotashCorp (NYSE: POT  ) 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 PotashCorp.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

19.8%

Pass

 

1-Year Revenue Growth > 12%

51.7%

Pass

Margins

Gross Margin > 35%

51.1%

Pass

 

Net Margin > 15%

36.1%

Pass

Balance Sheet

Debt to Equity < 50%

61.4%

Fail

 

Current Ratio > 1.3

1.08

Fail

Opportunities

Return on Equity > 15%

38.4%

Pass

Valuation

Normalized P/E < 20

17.33

Pass

Dividends

Current Yield > 2%

0.6%

Fail

 

5-Year Dividend Growth > 10%

29.5%

Pass

 
 
   
 

Total Score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at PotashCorp last year, the company has added a point, with a big boost in revenue pushing its five-year average to nearly 20%. Rising crop prices have definitely helped give farmers more disposable income to spend on yield-enhancing fertilizers like potash.

Throughout the agricultural sector, booming crop prices have helped companies in the industry. Equipment makers Deere (NYSE: DE  ) and CNH Global (NYSE: CNH  ) have seen sales surge, with a lot of that money falling to the bottom line as profits.

Almost across the board, fertilizer companies are also cashing in on that trend. In its most recent quarter, PotashCorp more than doubled its third-quarter revenue from a year ago, with emerging markets playing a big role in sales growth. Competitors Mosaic (NYSE: MOS  ) , CVR Partners (NYSE: UAN  ) , and China Green Agriculture (NYSE: CGA  ) saw similar growth. High prices are also driving expansion plans throughout the industry, although as the leader of a cartel with Mosaic and Agrium (NYSE: AGU  ) in Saskatchewan, PotashCorp has pricing power that gives it a big advantage over other competitors.

PotashCorp's future obviously depends on which direction crop prices go in the future. Despite being at high levels, commodities investor Jim Rogers thinks that commodities could go still higher, bringing more profit for PotashCorp. If he's right, then PotashCorp could climb even closer to perfection in the near 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.

Click here to add PotashCorp 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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of China Green Agriculture. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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