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 Archer-Daniels-Midland
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 Archer-Daniels-Midland.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 13.9% | Fail |
| 1-Year Revenue Growth > 12% | 10.2% | Fail | |
| Margins | Gross Margin > 35% | 5.6% | Fail |
| Net Margin > 15% | 2.8% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 79.8% | Fail |
| Current Ratio > 1.3 | 1.57 | Pass | |
| Opportunities | Return on Equity > 15% | 12.6% | Fail |
| Valuation | Normalized P/E < 20 | 14.23 | Pass |
| Dividends | Current Yield > 2% | 1.8% | Fail |
| 5-Year Dividend Growth > 10% | 12.0% | Pass | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Archer-Daniels-Midland wilts in the sun with a score of 3. Although agricultural commodities have been red-hot lately, ADM has become increasingly dependent on a form of energy that many critics say makes no sense.
ADM has become an increasingly diverse company. On one hand, it's a major player in agricultural services, buying and transporting various grains and oilseeds and reselling them as a variety of intermediate products, including food products as well as feed for animals. But the company has also moved strongly into corn ethanol production, relying on government subsidies to become one of the largest ethanol producers in the country.
Yet in some ways, that diversification is biting ADM right now. With crop prices on the rise, companies like Mosaic
But like meat producers Tyson Foods
Archer-Daniels-Midland is in a good industry at the right time. But unless it can start passing on its higher costs to its customers, its stock is doomed to fall short of perfection for the foreseeable future.
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.
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