Is ConocoPhillips the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether ConocoPhillips (NYSE: COP  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 ConocoPhillips.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2.1% fail
  1-Year Revenue Growth > 12% 21% pass
Margins Gross Margin > 35% 25.3% fail
  Net Margin > 15% 6.6% fail
Balance Sheet Debt to Equity < 50% 41.5% pass
  Current Ratio > 1.3 1.39 pass
Opportunities Return on Equity > 15% 16.9% pass
Valuation Normalized P/E < 20 11.45 pass
Dividends Current Yield > 2% 3.6% pass
  5-Year Dividend Growth > 10% 13.5% pass
       
  Total Score   7 out of 10

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

With a score of 7, ConocoPhillips comes reasonably close to perfection. Given that margins never got close to our target levels even when oil spiked to $147 a barrel, it's not terribly likely that the oil giant will improve on its score.

ConocoPhillips is using an interesting strategy that sets it apart from its major rivals. ExxonMobil (NYSE: XOM  ) completed its merger with gas giant XTO Energy earlier this year, while Chevron (NYSE: CVX  ) is entering the M&A arena with a bid for Atlas Energy (Nasdaq: ATLS  ) .

But instead of seeking major acquisitions, ConocoPhillips has joined Shell (NYSE: RDS-A  ) and BP (NYSE: BP  ) in divesting itself of assets. The company has sold part of its major stake in Russia's Lukoil as well as its share of Canada's Syncrude oil sands venture to Sinopec Group (NYSE: SNP  ) .

With a healthy dividend that has grown over time and a reasonable valuation, ConocoPhillips looks fairly attractive right now. If you're willing to accept the commodity-market risks that all oil companies share, then while ConocoPhillips may not be perfect, you could find worse places to put your money.

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 ConocoPhillips to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Chevron is a Motley Fool Income Investor choice. The Fool owns shares of ExxonMobil. 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.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1377132, ~/Articles/ArticleHandler.aspx, 7/30/2014 12:16:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement