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 Dean Foods
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 Dean Foods.
Factor |
What We Want to See |
Actual |
Pass or Fail? |
---|---|---|---|
Growth | 5-Year Annual Revenue Growth > 15% | 5.3% | Fail |
1-Year Revenue Growth > 12% | 7.7% | Fail | |
Margins | Gross Margin > 35% | 23.1% | Fail |
Net Margin > 15% | (12.1%) | Fail | |
Balance Sheet | Debt to Equity < 50% | NM | NM |
Current Ratio > 1.3 | 1.33 | Pass | |
Opportunities | Return on Equity > 15% | (225.5%) | Fail |
Valuation | Normalized P/E < 20 | 17.57 | Pass |
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 shareholder equity. Total score = number of passes.
With two points, Dean Foods doesn't deliver a very appetizing score. But the dairy producer's numbers are skewed badly due to goodwill impairment charges taken against its Fresh Dairy Direct business.
A couple years ago, Dean Foods was one of the worst performers in the stock market. Rising milk costs and falling demand from consumers for Dean's premium-brand products made things look dire for the company. Grocers Kroger
This margin-tightening situation was one felt around the industry, with Kraft Foods
Just yesterday, Dean shares soared on an earnings beat. CEO Gregg Engles sounded a note of cautious optimism in announcing the results.
Dean Foods still has a long way to go to recover fully. With a heavy debt load, it needs to keep newly implemented cost controls in place. If it can keep up the pace, however, Dean Foods could get a lot closer to perfection in the years 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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