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 Agrium (NYSE: AGU ) 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 Agrium.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||29.8%||Pass|
|1-Year Revenue Growth > 12%||47.1%||Pass|
|Margins||Gross Margin > 35%||28.0%||Fail|
|Net Margin > 15%||8.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||36.8%||Pass|
|Current Ratio > 1.3||2.08||Pass|
|Opportunities||Return on Equity > 15%||25.6%||Pass|
|Valuation||Normalized P/E < 20||10.17||Pass|
|Dividends||Current Yield > 2%||0.5%||Fail|
|5-Year Dividend Growth > 10%||20.5%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Agrium last year, the fertilizer make has seen a huge three-point gain in its score. Boosts in returns on equity and a big dividend hike combined with more reasonable valuations to account for the increase.
As part of the Canadian Potash Exporters group along with PotashCorp (NYSE: POT ) and Mosaic (NYSE: MOS ) , Agrium enjoyed a strong 2011. Deals with China and India at attractive rates helped power the company's profits, although that growth may slow in the near term as India works through a backlog of fertilizer inventory.
The fundamentals of the agriculture business continue to point toward better results for Agrium and its peers. Nitrogen-based fertilizer makers CF Industries (NYSE: CF ) and Terra Nitrogen (NYSE: TNH ) predict huge plantings of corn this year. As a mined product, potash is costlier to produce than nitrogen fertilizers, which explains why Agrium's margins are relatively low compared to CF's.
Still, Agrium beat expectations on both revenue and earnings for the fourth quarter of 2011. Last week, the company announced that it would expand its Missouri plant to boost capacity. That's just another sign of how, at least for now, trends are moving Agrium's way, and continued strength in the agricultural sector should keep the company moving toward perfection -- and sustain the stock well into the future.
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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