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 The Andersons (Nasdaq: ANDE) 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 The Andersons.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 22.7% Pass
  1-Year Revenue Growth > 12% 20.4% Pass
Margins Gross Margin > 35% 8.2% Fail
  Net Margin > 15% 1.9% Fail
Balance Sheet Debt to Equity < 50% 159.2% Fail
  Current Ratio > 1.3 1.32 Pass
Opportunities Return on Equity > 15% 15.5% Pass
Valuation Normalized P/E < 20 12.07 Pass
Dividends Current Yield > 2% 1.0% Fail
  5-Year Dividend Growth > 10% 17.5% Pass
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Andersons manages to come in with a reasonably good score of 6. The agricultural specialist has had nice tailwinds, but recent volatility in commodities could change that going forward.

Andersons has a wide variety of businesses aimed at the agricultural sector. Its grain and ethanol group manages transportation of a wide array of commodities as well as helping farmers get corn to ethanol production plants. To help with transport, Andersons also has a railcar and equipment segment. The company also produces fertilizer, including both industrial level fertilizer for farmers as well as specialty fertilizers for specific uses like golf courses and lawn care. It even has a retail segment.

With costs of farm products on the rise, Andersons has benefited from demand for ways to increase crop yields. Like Mosaic (NYSE: MOS) and PotashCorp (NYSE: POT), Andersons has seen big spikes in revenue from its plant nutrient business. And with high energy prices, the ethanol business is boosting Andersons along with competitors like Archer-Daniels-Midland (NYSE: ADM) and Cargill.

While recent results have been strong, Andersons will rely on solid prices for agricultural commodities in the future. At some point, though, demand from food processing companies like Kellogg (NYSE: K) and General Mills (NYSE: GIS) will wane from high prices, which could in turn hurt growth at Andersons. That's why Andersons isn't a perfect stock, although it has some promising characteristics that could help it succeed despite an uncertain 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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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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.