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 Diamond Foods (Nasdaq: DMND ) 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 Diamond Foods.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||15.1%||Pass|
|1-Year Revenue Growth > 12%||42%||Pass|
|Margins||Gross Margin > 35%||26%||Fail|
|Net Margin > 15%||5.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||116.9%||Fail|
|Current Ratio > 1.3||1.49||Pass|
|Opportunities||Return on Equity > 15%||12%||Fail|
|Valuation||Normalized P/E < 20||11.20||Pass|
|Dividends||Current Yield > 2%||0.7%||Fail|
|5-Year Dividend Growth > 10%||8.4%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With four points, Diamond Foods doesn't come very close to perfection. In fact, recent allegations have brought months of gains to an abrupt halt, and it's unclear where the company will go from here.
Diamond is a small snack company that produces nuts, dried fruit, popcorn, and Kettle brand potato chips. For much of its history, the company has been relatively obscure, dwarfed by much larger brands including Kraft (NYSE: KFT ) , PepsiCo (NYSE: PEP ) , and ConAgra (NYSE: CAG ) . That all changed, however, when it announced it would acquire the Pringles unit of Procter & Gamble (NYSE: PG ) in a transaction that would triple Diamond's revenues.
But recently, Diamond has found itself under a cloud of controversy. Early this month, the company announced that it was delaying the closing of its Pringles acquisition to investigate its accounting practices relating to payments to its walnut growers. Then, last week, Joe Silveira, who had served on the company's board of directors and audit committee, passed away, with some speculating that the death was a suicide. The combination of those two factors has sent shares down 65% since the end of September.
Obviously, everything hangs in the balance while Diamond's accounting issue remains outstanding. With the damage already done to the company's share price, the market evidently believes that the P&G deal won't go through. With the stock priced for failure, anything better than the worst-case scenario could make investors feel like Diamond is a perfect stock -- but risk-averse investors will still want to wait and see what happens.
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."