Is Chevron 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 if Chevron (NYSE: CVX  ) 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 Chevron.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 1.3% Fail
  1-Year Revenue Growth > 12% 21.4% Pass
Margins Gross Margin > 35% 32.5% Fail
  Net Margin > 15% 9.0% Fail
Balance Sheet Debt to Equity < 50% 10.4% Pass
  Current Ratio > 1.3 1.66 Pass
Opportunities Return on Equity > 15% 17.4% Pass
Valuation Normalized P/E < 20 10.62 Pass
Dividends Current Yield > 2% 3.1% Pass
  5-Year Dividend Growth > 10% 10.5% Pass
       
  Total Score   7 out of 10

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

Chevron makes a strong showing with a score of 7. The energy giant shares many of the favorable traits of its peers, but also has some unique advantages.

Looking at the industry overall, large oil companies have seen the tide turn as prices have once again started to approach the $100-per-barrel level. That's showing up in revenue growth, as ConocoPhillips (NYSE: COP  ) and ExxonMobil (NYSE: XOM  ) have also seen 20% or greater rises in revenue in the past year. Yet they're trading at relatively low valuations, perhaps on the assumption that price increases are temporary in nature.

But Chevron isn't relying solely on its existing business for growth. It recently announced that it would acquire natural gas producer Atlas Energy (Nasdaq: ATLS  ) in a deal worth $4.3 billion. Natural gas prices haven't seen the same gains as oil, making the gas sector a relative bargain and spurring acquisition interest in the industry. If prices recover, then buys like Chevron's will look like very smart moves.

In the meantime, Chevron shareholders get the benefit of a healthy dividend yield that has grown consistently over time as well as a clean balance sheet and margins that are higher than Exxon's and Conoco's. That may not be enough to make Chevron a perfect stock, but it's pretty attractive right now.

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 Chevron 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 pick. 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.


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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.

  • Report this Comment On January 18, 2011, at 5:35 PM, 1caflash wrote:

    Dan, You're The Man!! I added to CVX January 14, 2011, and Increased My Income. It did not hurt me. Jan. 18th, I strengthened my Position in Merck. It is time for me to battle Jim Cramer. While C might be O.K., here is MY 2011 Speculative Stock of the Year: PRGN. Paragon Shipping has a Fine Management Team, a Dividend-Paying History, and is at Its Yearly Lows. This Sector has been Lagging. My Financial Advisor, who is Half My Age [31], just Bought me 8,100 shares of this Beauty. I Really Enjoy Investing. Aaron, my F.A., got me interested in SPIL and It is doing Fine. Thank You Dan, Motley Fool and other Swell Folks for Teaching Me How to BP! [Build Positions]. I Wish You Investor Heaven during Two-Thousand Eleven.

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