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 Noble (NYSE: NE ) 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 Noble.
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 6, Noble puts in a strong showing. The offshore driller has gone through a tough period recently, but higher energy prices and increasing interest in drilling could bode well for the company's future.
Until last year, prospects for oil drillers looked good. 2008's big price spike in oil had everyone calling for measures to increase oil supply. But when the Gulf oil spill happened, offshore drilling slammed on the brakes, and the consequences put a major crimp in the prospects for drillers domestically. Marathon Oil (NYSE: MRO ) canceled a four-year drilling contract with Noble worth more than $750 million.
But even with lingering questions in the Gulf of Mexico, drilling is moving full speed ahead elsewhere. Noble recently joined Seadrill (NYSE: SDRL ) , Pride International (NYSE: PDE ) , and DryShips (Nasdaq: DRYS ) in ordering new drilling rigs. At $600 million per rig, that may seem risky, but Noble recently signed a letter of intent with Royal Dutch Shell (NYSE: RDS-A ) , offering one of the rigs for a 5.5 year term at $410,000 per day plus a potential 15% performance bonus. That should be enough to cover the cost of the rig by itself, giving Noble the rest of the rig's productive life as potential profit.
With returns on equity and short-term revenue growth reflecting the impact of the Gulf spill, Noble can expect to see its score increase as long as current conditions continue. Over the long haul, if oil remains as important as it is today, then Noble could easily be the perfect stock for buy-and-hold investors.
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 Noble to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
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