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 if Enterprise Products Partners (NYSE: EPD ) 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 Enterprise Products Partners.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||23.5%||pass|
|1-Year Revenue Growth > 12%||(5%)||fail|
|Margins||Gross Margin > 35%||7.3%||fail|
|Net Margin > 15%||4.5%||fail|
|Balance Sheet||Debt to Equity < 50%||129.7%||fail|
|Current Ratio > 1.3||1.00||fail|
|Opportunities||Return on Equity > 15%||16.8%||pass|
|Valuation||Normalized P/E < 20||19.99||pass|
|Dividends||Current Yield > 2%||5.7%||pass|
|5-Year Dividend Growth > 10%||6.6%||fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Enterprise Products Partners scores just four points. But even though Enterprise doesn't fit naturally into the perfect-stock framework, the natural gas storage and transport company has plenty of things going for it.
Times have been tough for natural gas producers. Gas-focused players Chesapeake Energy (NYSE: CHK ) and Ultra Petroleum (NYSE: UPL ) have seen their stocks languish over the past five years, as numerous new shale gas plays added to a glut of the clean-burning fuel. With Enterprise, however, its pipeline and transport business are based more on volume than on price. As a result, Enterprise's bottom line isn't as sensitive to the slump in gas prices as other companies in the industry.
Over time, Enterprise has rewarded investors. Back in 2004, the Fool's Income Investor newsletter recommended the stock, arguing that as a master limited partnership, Enterprise stood to benefit from favorable tax deferral provisions as well as increased energy activity. The stock has doubled since the initial recommendation.
What's unclear, though, is what the future will bring for Enterprise. The company recently did a secondary stock offering, raising just more than $500 million to help pay down a bit of its hefty debt load. Yet the debt is par for the course for the industry; in fact, pipeline competitors Kinder Morgan Partners (NYSE: KMP ) and Spectra Energy (NYSE: SE ) both have worse debt-to-equity ratios than Enterprise.
Enterprise's business may not be the most exciting in the world, but the results for investors speak for themselves. Even though it doesn't meet all of our perfect stock criteria, long-term shareholders couldn't have asked much more from Enterprise.
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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