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 Kellogg
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 Kellogg.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||4%||Fail|
|1-Year Revenue Growth > 12%||(1.3%)||Fail|
|Margins||Gross Margin > 35%||42.5%||Pass|
|Net Margin > 15%||9.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||260%||Fail|
|Current Ratio > 1.3||0.89||Fail|
|Opportunities||Return on Equity > 15%||50.1%||Pass|
|Valuation||Normalized P/E < 20||19.41||Pass|
|Dividends||Current Yield > 2%||2.8%||Pass|
|5-Year Dividend Growth > 10%||7.9%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Kellogg's score of 4 doesn't show any obvious elfin magic. The processed food manufacturer has had to deal with strong headwinds from adverse cost trends that are clamping down on sales and margins.
Kellogg is well known for its cereals. But it also has a thriving snack business, with offerings including Pop-Tarts, Nutri-Grain bars, and Eggo waffles. Cereal and snacks make up about 90% of its business.
Like competitors Kraft Foods
Perhaps the most troublesome thing about Kellogg is its big debt load. Despite the high debt-to-equity ratio, though, the company has a healthy interest coverage ratio yet still manages to pay out a 2.8% dividend yield. And with borrowing rates low, Kellogg has plenty of time to rein in its debt before it can cause big problems.
Processed food may not be the highest-growth business in the world. But for those looking to keep risk to a minimum with high-profile blue-chip stocks, Kellogg may be a balanced part of a nutritious portfolio.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.