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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 BP (NYSE: BP ) 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 different 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 BP.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.4%||Fail|
|1-Year Revenue Growth > 12%||24.1%||Pass|
|Margins||Gross Margin > 35%||3.8%||Fail|
|Net Margin > 15%||(1.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||47.3%||Pass|
|Current Ratio > 1.3||1.15||Fail|
|Opportunities||Return on Equity > 15%||(3.4%)||Fail|
|Valuation||Normalized P/E < 20||NM||Fail|
|Dividends||Current Yield > 2%||3.8%||Pass|
|5-Year Dividend Growth > 10%||(5.7%)||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful. Total score = number of passes.
BP weighs in with a score of 3, leaving it well short of perfection. Despite the company's huge fallout from the Gulf oil spill, it has bounced back and looks poised to emerge strongly to take advantage of a very favorable environment for energy companies.
After the Gulf oil spill, many investors seemed to leave BP for dead. The company had to discontinue its dividend, and with rivals ExxonMobil (NYSE: XOM ) and Chevron (NYSE: CVX ) unburdened by uncertainties about the aftermath of the spill, only deep value players thought BP could stand up to the competition.
Recently, though, BP restored its dividend -- albeit at just half the pre-spill level. And just as related companies ATP Oil & Gas (Nasdaq: ATPG ) and Transocean (NYSE: RIG ) have largely come back from the collateral damage they suffered after the spill, so too have BP shares rebounded sharply from their post-spill lows.
A cloud still hangs over BP, as litigation stemming from the spill will continue for a long time. But the stock is cheaply valued based on analyst estimates for earnings this year and next, so if the company can avoid any more unforeseen surprises, value-seekers may want to take a closer look at BP.
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 BP 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.