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 Tyson Foods
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 Tyson Foods.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.5%||Fail|
|1-Year Revenue Growth > 12%||9.0%||Fail|
|Margins||Gross Margin > 35%||5.9%||Fail|
|Net Margin > 15%||1.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||37.4%||Pass|
|Current Ratio > 1.3||2.19||Pass|
|Opportunities||Return on Equity > 15%||10.4%||Fail|
|Valuation||Normalized P/E < 20||13.01||Pass|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Tyson Foods last year, the company has lost a point, as its return on equity has dropped precipitously in the face of even tighter margins. Yet the stock has managed a small gain over the past year.
Like other players in the food industry, Tyson has taken a hit from inflationary pressure, as feed costs have risen dramatically in recent years. As a result, even while the company has seen revenue grow, profits have fallen. Meanwhile, a glut of supply has kept Tyson and its peers from raising prices, although the company projects that the glut may work itself out this year.
The industry got a black eye earlier this year after controversy over "pink slime" forced changes. Although the FDA considers ammonia-treated beef trimmings safe, public outrage led McDonald's
But chicken production has gotten a bump up even in a traditionally slow season. Pilgrim's Pride
For Tyson to improve, it first and foremost needs feed prices to come down. Barring that, the company will have a tough time boosting margins enough to make any progress toward becoming a perfect stock.
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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