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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 Suncor Energy (NYSE: SU ) 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 Suncor Energy.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||28.0%||Pass|
|1-Year Revenue Growth > 12%||34.1%||Pass|
|Margins||Gross Margin > 35%||47.5%||Pass|
|Net Margin > 15%||8.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||33.7%||Pass|
|Current Ratio > 1.3||1.14||Fail|
|Opportunities||Return on Equity > 15%||5.2%||Fail|
|Valuation||Normalized P/E < 20||35.13||Fail|
|Dividends||Current Yield > 2%||1.1%||Fail|
|5-Year Dividend Growth > 10%||27.2%||Pass|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 5, Suncor doesn't come out looking too energetic. But the Canadian energy company could continue to benefit from high oil prices if the energy markets stay tight.
The U.S. gets a lot of oil from Canada, and more than half of the oil it imports from its northern neighbor comes from Alberta's oil sands. Suncor is part of a joint venture called Syncrude with Nexen (NYSE: NXY ) , Imperial Oil (AMEX: IMO ) , and other producers to make synthetic crude from oil sands.
However, Suncor doesn't outshine all of its competitors. Canadian Natural Resources (NYSE: CNQ ) offers better margins and returns on equity at a lower earnings multiple. Imperial also trades more cheaply, although its recent revenue growth doesn't compare well to Suncor.
Despite some environmental concerns, sustained high oil prices should keep producers interested in the oil sands, and that spells good news for Suncor. It may not become the perfect stock, but it could produce plenty of black gold for shareholders in the long run.
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.