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 ExxonMobil (NYSE: XOM ) 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 ExxonMobil.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||0.8%||Fail|
|1-Year Revenue Growth > 12%||22.9%||Pass|
|Margins||Gross Margin > 35%||32.3%||Fail|
|Net Margin > 15%||8.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||12.6%||Pass|
|Current Ratio > 1.3||1.01||Fail|
|Opportunities||Return on Equity > 15%||21.6%||Pass|
|Valuation||Normalized P/E < 20||11.97||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||9%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, ExxonMobil puts in a decent performance. But nothing about the energy industry has been average lately, and it appears that ExxonMobil and its peers could have interesting and profitable times ahead.
Once a company gets as big as ExxonMobil, it's unusual to see fast growth -- the amounts of money involved are simply too great. ExxonMobil will never be able to match the consistent quick growth rates of smaller energy-related companies like ATP Oil & Gas (Nasdaq: ATPG ) or National Oilwell Varco (NYSE: NOV ) , if only because of the law of large numbers.
But because the energy giant is sensitive to prices of oil and gas, you can still see big swings in ExxonMobil's sales figures from year to year. Oil prices in particular have been extremely volatile in recent years, ranging from highs above $145 per barrel to lows around $30. But they've moved up again lately to breach the $90 mark, and energy stocks are enjoying the extra business.
With dividend investing becoming hugely popular, ExxonMobil is an obvious choice for those seeking healthy payouts. Even here, though, you'll feel the effect of the company's gargantuan size; competitors Chevron (NYSE: CVX ) and ConocoPhillips (NYSE: COP ) both have higher dividend yields and have grown their payouts at a faster pace in the past five years.
Going forward, ExxonMobil's future success may rely more heavily on the fate of natural gas, which has been stuck at low prices despite oil's rebound. The company's purchase of gas producer XTO Energy added a great deal of exposure to the cleaner-burning fuel, and the buyout may look like the ultimate bargain if the industry sees better pricing.
In the meantime, you can collect quarterly dividend checks while also getting a partial hedge against higher energy costs. That may not make ExxonMobil the perfect stock, but it could still be a useful part of your portfolio.
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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