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 Tyson Foods (NYSE: TSN ) 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 Tyson Foods.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.5%||Fail|
|1-Year Revenue Growth > 12%||9.0%||Fail|
|Margins||Gross Margin > 35%||5.9%||Fail|
|Net Margin > 15%||1.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||37.4%||Pass|
|Current Ratio > 1.3||2.19||Pass|
|Opportunities||Return on Equity > 15%||10.4%||Fail|
|Valuation||Normalized P/E < 20||13.01||Pass|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Tyson Foods last year, the company has lost a point, as its return on equity has dropped precipitously in the face of even tighter margins. Yet the stock has managed a small gain over the past year.
Like other players in the food industry, Tyson has taken a hit from inflationary pressure, as feed costs have risen dramatically in recent years. As a result, even while the company has seen revenue grow, profits have fallen. Meanwhile, a glut of supply has kept Tyson and its peers from raising prices, although the company projects that the glut may work itself out this year.
The industry got a black eye earlier this year after controversy over "pink slime" forced changes. Although the FDA considers ammonia-treated beef trimmings safe, public outrage led McDonald's (NYSE: MCD ) to stop using it last year, and Supervalu (NYSE: SVU ) and other grocers said earlier this year that they'd stop carrying beef that contains it. Tyson saw an immediate impact on demand for its beef products, and it's uncertain how soon consumers will get over the episode.
But chicken production has gotten a bump up even in a traditionally slow season. Pilgrim's Pride (NYSE: PPC ) saw significantly better margins this quarter, even though Tyson still weighed in with better margins and sales growth. Yet Sanderson Farms (Nasdaq: SAFM ) is still operating at negative margins, an unsustainable situation that will require it to become more competitive against Tyson in the future.
For Tyson to improve, it first and foremost needs feed prices to come down. Barring that, the company will have a tough time boosting margins enough to make any progress toward becoming 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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