Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Halliburton (NYSE: HAL ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many areas, including these important factors:
- 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Halliburton.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||12.2%||Fail|
|1-Year Revenue Growth > 12%||22.5%||Pass|
|Margins||Gross Margin > 35%||18.0%||Fail|
|Net Margin > 15%||10.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||36.8%||Pass|
|Current Ratio > 1.3||3.22||Pass|
|Opportunities||Return on Equity > 15%||18.8%||Pass|
|Valuation||Normalized P/E < 20||24.25||Fail|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||7.6%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just four points, Halliburton isn't our perfect stock. But the oil services company has recovered quite a bit from its role in the Gulf oil spill last year.
Halliburton became infamous last year as the contractor responsible for cementing the BP (NYSE: BP ) Macondo well, which was involved in Transocean's (NYSE: RIG ) Deepwater Horizon rig explosion that in turn caused the Gulf tragedy. Between the government trying to pin blame and the various players seeking to point at each other, Halliburton shares took a big hit.
Since the worst of the spill, though, Halliburton has recovered. Shares have doubled from their lows. Financially, the company compares well to its oil services peers, with better margins and returns on equity than rival Baker Hughes (NYSE: BHI ) as well as smaller companies like Weatherford International (NYSE: WFT ) . Halliburton even stands up to industry giant Schlumberger (NYSE: SLB ) on revenue growth, and thanks in part to uncertainty from the spill, Halliburton has one of the cheapest valuations in the group.
Until all the issues concerning the Gulf spill are put to rest, Halliburton will likely continue to have a stigma attached to it. But with energy as hot as it is right now, investors are already looking forward to Halliburton looking a lot closer to perfect in the coming years.
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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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.