Is BP the Perfect Stock?

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.

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% 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.

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 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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Chevron is a Motley Fool Income Investor choice. The Fool owns shares of ExxonMobil and Transocean. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On April 05, 2011, at 10:14 AM, Bipolarbear55 wrote:

    Where is the logic in this article? Comparing a stock to your own very high bench marks is hardly objective is it and redundant as investment advice. How does BP fare in comparison to other oil and gas stocks or even blue chips?

    Your logic is completely circular; if a stock could indeed satisfy most of these criteria wholly, smarter people than you would already know about it and would buy it, by the time a stock has half of those items are positivity then amateur speculators would already be piling money in and the stock would be trading at high P/E’s making it fail your criteria.

    You fail to consider the main aspect of why an investor may want to invest in an oil company. Oil prices are higher now due to conflicts near some of the main oil producing nations. However oil prices for crude are likely to stay high based on fundamentals alone, drilling is hazardous and will be more tightly regulated, known reserves are being depleted faster than new discoveries are being made and developing countries still rely on oil as their primary energy source. Start up capital for new drilling ventures for oil exploration is not easy to find due to contraction of credit and new risk seen from private investors after the BP fiasco, furthermore it is increasingly seen as untenable for banks and even private investment vehicles to invest in oil related projects due to environmental concerns. Furthermore as commodity oil has intrinsic value, the price of oil will move in line with inflation as the wise have been warning for years we are starting to feel it now. These factors make the fundamentals for a cash rich oil company better and make it logical investment.

  • Report this Comment On April 20, 2011, at 10:23 PM, PeakOilBill wrote:

    Don't forget the possible US Government fine for the BP spill. I have heard that it could be $20 BILLION or so, in a worse case judgement. It could be a LOT less, but that is a risk you can't ignore.

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