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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 Petroleo Brasileiro (NYSE: PBR ) 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 Petrobras.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||10.1%||Fail|
|1-Year Revenue Growth > 12%||10.2%||Fail|
|Margins||Gross Margin > 35%||36.6%||Pass|
|Net Margin > 15%||15.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||38.7%||Pass|
|Current Ratio > 1.3||1.71||Pass|
|Opportunities||Return on Equity > 15%||13.8%||Fail|
|Valuation||Normalized P/E < 20||11.60||Pass|
|Dividends||Current Yield > 2%||3.7%||Pass|
|5-Year Dividend Growth > 10%||11.9%||Pass|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With seven points, Petrobras comes out looking pretty good. But the future may well be even brighter for the emerging-market oil giant.
Brazil has seen some huge oil discoveries in the past several years. In 2007, a discovery at the offshore Tupi field led to estimates of 8 billion barrels of reserves. Those estimates were recently confirmed, vaulting the country into the upper echelons of oil exporters.
As Brazil's state-run oil company, Petrobras stands to benefit the most from recent finds. Although other companies, including ExxonMobil (NYSE: XOM ) and Anadarko Petroleum (NYSE: APC ) , have good-sized interests in Brazilian oil fields, Petrobras plans to spend more than $200 billion over the next five years to develop the area. With a recent huge stock offering to raise capital, Petrobras is primed to get even bigger in the years to come.
Actually getting energy from the fields, though, will take some doing. With much of Brazil's reserves under deep water, the company needs to use deepwater drilling techniques of the same sort that caused BP so many problems last year. Yet with drillers Seadrill (Nasdaq: SDRL ) , DryShips (Nasdaq: DRYS ) , and Pride International (NYSE: PDE ) ramping up orders of deepwater rigs, it's clear that Petrobras will get the support it needs to get wells going.
Of course, the profitability of these projected depends on oil prices going forward. But with oil showing no signs of dropping significantly, Petrobras finds itself in exactly the right place at the right time. That could make it a perfect stock for investors down the road.
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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