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 Andersons
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 Andersons.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 24.4% | Pass |
| 1-Year Revenue Growth > 12% | 28.3% | Pass | |
| Margins | Gross Margin > 35% | 7.6% | Fail |
| Net Margin > 15% | 2.0% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 110.6% | Fail |
| Current Ratio > 1.3 | 1.32 | Pass | |
| Opportunities | Return on Equity > 15% | 18.7% | Pass |
| Valuation | Normalized P/E < 20 | 9.38 | Pass |
| Dividends | Current Yield > 2% | 1.3% | Fail |
| 5-Year Dividend Growth > 10% | 21.7% | Pass | |
| Total Score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Andersons last year, the company has kept its six-point score. Continuing strength in the agricultural sector has helped support the company's main segments, leading to a healthy gain for the stock over the past year.
Andersons does business in a number of areas. In addition to its retail stores, Andersons operates grain elevator storage facilities, makes and distributes fertilizers, and produces ethanol, among other things.
Last summer, agriculture stocks seemed to be poised for a long decline. Crop prices moved down briefly, and votes to repeal ethanol subsidies weighed especially hard on Archer Daniels Midland
Yet even as many crop prices have continued to stagnate or even fall, ag stocks have come back with a vengeance. Still, weak comparisons largely explain Andersons' revenue growth, and without further price gains, it will be hard for the company to sustain that growth. Although divisions like its railcar transport business and fertilizers may well stay perked up, they may not be enough to support a strong growth rate.
For Andersons to keep moving forward, it needs to sustain its growth while getting debt better under control. Most importantly, though, any threat to crop prices could have a huge negative effect on the company and push it further away from perfection.
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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