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 Pilgrim's Pride
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 Pilgrim's.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 7.8% | Fail |
| 1-Year Revenue Growth > 12% | 19.9% | Pass | |
| Margins | Gross Margin > 35% | (0.5%) | Fail |
| Net Margin > 15% | (4.9%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 229.6% | Fail |
| Current Ratio > 1.3 | 2.16 | Pass | |
| Opportunities | Return on Equity > 15% | (43.3%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 2 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With just two points, Pilgrim's Pride hasn't cooked up great results lately. The company has struggled in a difficult market environment for chicken.
Pilgrim's specializes in poultry products. That has been a tough market lately, as crop prices have surged in recent years. Just as Archer Daniels Midland
At the same time, Pilgrim's has seen a glut of chicken put a lid on revenue, leading to severe margin compression. Although competitors Sanderson Farms
Earlier this week, Pilgrim's announced a rights offering, which would require current shareholders either to put up $4.50 per share to buy additional shares or accept dilution. Such offerings are arguably fairer to shareholders than simply doing a separate secondary offering, but it still indicates that Pilgrim's needs additional capital -- although the company hasn't yet announced exactly what it will do with the roughly $200 million in net proceeds.
Unfortunately for shareholders, it may be a while before the imbalances in the poultry industry correct themselves. Until costs fall or revenue rises, Pilgrim's has no chance of being a perfect stock.
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 ."
