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 Hormel Foods (NYSE: HRL ) 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 Hormel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.6%||Fail|
|1-Year Revenue Growth > 12%||8.1%||Fail|
|Margins||Gross Margin > 35%||16.2%||Fail|
|Net Margin > 15%||5.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||9.1%||Pass|
|Current Ratio > 1.3||2.79||Pass|
|Opportunities||Return on Equity > 15%||17.3%||Pass|
|Valuation||Normalized P/E < 20||18.24||Pass|
|Dividends||Current Yield > 2%||2.1%||Pass|
|5-Year Dividend Growth > 10%||13.3%||Pass|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Hormel last year, the stock has kept the same six-point score. The meat company's shares performed reasonably well, with a higher dividend making up for slightly slower sales growth in the past year.
Food producers have faced a tough environment in recent years. High feed costs have hurt pork producers, with both Smithfield Foods (NYSE: SFD ) and Sanderson Farms (Nasdaq: SAFM ) having to deal with the prospect of shrinking profit margins as a result. Moreover, the problem isn't limited to pork, as a glut of chicken combined with feed costs to spell trouble for Pilgrim's Pride (NYSE: PPC ) as well, although that company saw margins improve somewhat in its most recent quarter. As for Hormel, it managed to meet estimates but fell short of last year's earnings levels.
One big potential growth area for Hormel is from international sales. Although Hormel gets relatively little of its revenue from exports, the segment has seen higher profit growth than in most of its domestic markets. Trying to expand its international presence will pit Hormel against Brasil Foods (NYSE: BRFS ) , which has a highly diversified line of food products and will pose a formidable challenge if Hormel aims itself toward Latin America.
Hormel needs to see more favorable feed prices persist for a while if it wants to get its margins moving in the right direction. If looking abroad proves successful, then it could be the answer to how Hormel can generate the sales growth it needs to become 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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