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 Intrepid Potash (NYSE: IPI ) 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 Intrepid Potash.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||23.2%||Pass|
|1-Year Revenue Growth > 12%||28.7%||Pass|
|Margins||Gross Margin > 35%||45.5%||Pass|
|Net Margin > 15%||24.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.1%||Pass|
|Current Ratio > 1.3||6.32||Pass|
|Opportunities||Return on Equity > 15%||12.1%||Fail|
|Valuation||Normalized P/E < 20||15.60||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With seven points, Intrepid Potash puts up a good score. Even as the entire potash-based fertilizer group has come under fire, Intrepid has some attractive traits that make it stand out from its larger peers.
The agriculture sector has had an excellent past couple of years, and all indications suggest those favorable conditions are likely to continue. Warm weather over the winter helped spur record corn plantings, and corn is particularly fertilizer-dependent.
Given Intrepid's strategic position as the biggest potash producer in the U.S., it has a competitive advantage over Canadian rivals PotashCorp (NYSE: POT ) and Mosaic (NYSE: MOS ) . Canada's three-member cartel, which also includes Agrium, may have gotten recent orders from China, but Intrepid is poised to see the most significant direct impact from high U.S. demand.
One big obstacle to Intrepid's success may come from other segments of the fertilizer industry. Nitrogen-based fertilizer companies Terra Nitrogen (NYSE: TNH ) and CVR Partners (NYSE: UAN ) have held up better than potash producers, as low natural-gas prices have kept costs low a key input for nitrogen fertilizer production. Of course, different crops require different nutrients, but nitrogen is a key need for corn.
Intrepid makes enough money that a substantial dividend would be the easiest way for Intrepid to keep moving toward perfection. The company's reluctance to do so may signal concerns about how sustainable current ideal conditions in the industry are, but for now, investors may want to take advantage of a beaten-down share price to take a close look at potash stocks like Intrepid.
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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