Has BP Prudhoe Bay Become the Perfect Stock?

 

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 BP Prudhoe Bay (NYSE: BPT  ) 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 BP Prudhoe Bay.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.6% Fail
  1-Year Revenue Growth > 12% 14.5% Pass
Margins Gross Margin > 35% 100.0% Pass
  Net Margin > 15% 99.5% Pass
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 3.26 Pass
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 19.33 Pass
Dividends Current Yield > 2% 6.8% Pass
  5-Year Dividend Growth > 10% 0.4% Fail
       
  Total Score   7 out of 9

Source: S&P Capital IQ. NM = not meaningful; BP Prudhoe Bay has negligible shareholder equity. Total score = number of passes.

Since we looked at BP Prudhoe Bay last year, the company has seen its valuation slip enough to get under the key 20 level. Although the royalty trust's structure makes some of these categories less valuable data points than they are for regular stocks, they still reveal the continuing strength in energy prices and their impact on BP Prudhoe Bay.

Royalty trusts like BP Prudhoe Bay give much more focused exposure to certain specific locations than typical energy stocks. While BP (NYSE: BP  ) has operations around the world, BP Prudhoe Bay is tied entirely to Alaska's North Slope.

What's remarkable about BP Prudhoe Bay, though, is that it has managed to keep revenue on the rise. By contrast, royalty trusts that operate in other areas, including the Permian Basin Royalty Trust (NYSE: PBT  ) in west Texas, the San Juan Basin Royalty Trust (NYSE: SJT  ) in northwestern New Mexico, and the Hugoton Royalty Trust (NYSE: HGT  ) focusing on the Southern Plains, have seen revenue decline both this year and longer term. BP Prudhoe Bay's outperformance has been strong enough to make it the dividend stock of the millennium -- at least so far.

For BP Prudhoe Bay to keep thriving, it needs energy prices to stay high as well as continued strength in production. As long as those tailwinds persist, though, the stock should stay close to 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.

Click here to add BP Prudhoe Bay to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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