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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 Marathon Oil (NYSE: MRO ) 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 Marathon Oil.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||4.4%||Fail|
|1-Year Revenue Growth > 12%||49.2%||Pass|
|Margins||Gross Margin > 35%||13.6%||Fail|
|Net Margin > 15%||3.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||34%||Pass|
|Current Ratio > 1.3||1.21||Fail|
|Opportunities||Return on Equity > 15%||11.3%||Fail|
|Valuation||Normalized P/E < 20||12.60||Pass|
|Dividends||Current Yield > 2%||2.1%||Pass|
|5-Year Dividend Growth > 10%||9.3%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of just 4, Marathon clearly isn't perfect. But with oil prices on the rise, the company has seen a recent ramp-up in growth and could be well-poised to cash in on yet another oil boom.
Marathon has been making quite a few strategic moves recently. Last month, it announced that it planned to spin off its downstream business, including its refinery, oil pipeline, and gas station segments. The move will take Marathon out of competition with refiners Valero (NYSE: VLO ) and Western Refining (NYSE: WNR ) , which have much lower margins and returns on equity, and instead let it focus on its higher-margin core business.
In addition, the company has been making shale-gas acquisitions recently. In late 2009, it joined major oil producers in a promising area in Poland, and last November, it entered the Eagle Ford shale play in November with a 75,000-acre purchase.
As a smaller player, Marathon can post faster growth than its competitors. Marathon's revenue growth rate of nearly 50% over the past year is well above those of Chevron (NYSE: CVX ) and ConocoPhillips (NYSE: COP ) , which are in the 25% to 30% range. Its dividends aren't as attractive as those competitors and haven't grown as quickly in recent years, but they aren't insignificant.
Marathon isn't the best-known oil play, but its recent moves demonstrate that it wants to be a global player in the industry. Even if it isn't the perfect stock, Marathon will likely make its presence felt in the years to come.
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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