Has Cosan Become the Perfect Stock?

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 Cosan (NYSE: CZZ  ) 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 Cosan.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

46.4%

Pass

 

1-Year Revenue Growth > 12%

30%

Pass

Margins

Gross Margin >
35%

9.8%

Fail

 

Net Margin > 15%

0.7%

Fail

Balance Sheet

Debt to Equity < 50%

63%

Fail

 

Current Ratio > 1.3

1.80

Pass

Opportunities

Return on Equity > 15%

3.4%

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

1.5%

Fail

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

3 out of 8

Source: S&P Capital IQ. NM = not meaningful due to negative earnings and because Cosan started paying a dividend in Aug. 2010. Total score = number of passes.

Since we looked at Cosan last year, the company has plunged four points. Revenue growth has continued, but profits have disappeared, and the company's debt situation has worsened. Still, the stock has performed well, rising about 40% over the past year.

Cosan has an interesting mix of businesses. As a sugar cane grower, the Brazilian company sells candy and other sugar-rich foods. But it also makes sugar-based ethanol, as well as other lubricants, that it distributes and sells under the Shell brand name.

Ethanol has been a controversial subject in the U.S., as higher corn prices have made it more costly for Archer-Daniels-Midland (NYSE: ADM  ) to produce the fuel. Yet, with both Presidential candidates supporting greater ethanol production, corn-related companies Monsanto (NYSE: MON  ) and ConAgra (NYSE: CAG  ) stand to benefit, even if greater U.S. production hampers Cosan's ability to penetrate the U.S. market with its sugar-based ethanol. Many believe that sugar-based ethanol is scientifically more efficient than corn-based ethanol, boding well for Cosan's future.

But there's a lot of competition on the ag front in South America, as well. Adecoagro (NYSE: AGRO  ) has suffered from a drought, while Cresud has to deal with the hostile political environment in Argentina. Despite those challenges, both companies have plenty of growth potential that could squeeze Cosan if it doesn't take steps to remain competitive. Cosan's loss during its most recent quarter reflected a 45% plunge in year-over-year sugar production, and a 40% drop in ethanol sales.

For Cosan to improve, it needs to refocus on more profitable ventures. If it can't succeed, then it may never get much closer to perfection.

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.

Cosan is well-placed to benefit from South American growth, but profiting from our increasingly global economy can be as easy as investing in your own backyard. Our free report, 3 American Companies Set to Dominate the World, shows you how. Click here to get your free copy before it's gone.

Click here to add Cosan to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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