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 Pilgrim's Pride (NYSE: PPC ) 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 Pilgrim's.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.8%||Fail|
|1-Year Revenue Growth > 12%||19.9%||Pass|
|Margins||Gross Margin > 35%||(0.5%)||Fail|
|Net Margin > 15%||(4.9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||229.6%||Fail|
|Current Ratio > 1.3||2.16||Pass|
|Opportunities||Return on Equity > 15%||(43.3%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||2 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With just two points, Pilgrim's Pride hasn't cooked up great results lately. The company has struggled in a difficult market environment for chicken.
Pilgrim's specializes in poultry products. That has been a tough market lately, as crop prices have surged in recent years. Just as Archer Daniels Midland (NYSE: ADM ) and ConAgra (NYSE: CAG ) feel the hurt in part from rising crop prices because they have higher costs in making their food products, so too do companies like egg-seller Cal-Maine Foods (Nasdaq: CALM ) and Pilgrim's suffer from higher feed costs.
At the same time, Pilgrim's has seen a glut of chicken put a lid on revenue, leading to severe margin compression. Although competitors Sanderson Farms (Nasdaq: SAFM ) , Tyson Foods (NYSE: TSN ) , and Smithfield Foods (NYSE: SFD ) all have faced similar problems, Tyson and Smithfield at least have more diverse product lines that include other meats such as pork and beef.
Earlier this week, Pilgrim's announced a rights offering, which would require current shareholders either to put up $4.50 per share to buy additional shares or accept dilution. Such offerings are arguably fairer to shareholders than simply doing a separate secondary offering, but it still indicates that Pilgrim's needs additional capital -- although the company hasn't yet announced exactly what it will do with the roughly $200 million in net proceeds.
Unfortunately for shareholders, it may be a while before the imbalances in the poultry industry correct themselves. Until costs fall or revenue rises, Pilgrim's has no chance of being a perfect stock.
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."