Is Teekay Tankers 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 Teekay Tankers (NYSE: TNK  ) 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 Teekay Tankers.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (0.2%) Fail
  1-Year Revenue Growth > 12% (19.8%) Fail
Margins Gross Margin > 35% 64.1% Pass
  Net Margin > 15% 13.5% Fail
Balance Sheet Debt to Equity < 50% 67.6% Fail
  Current Ratio > 1.3 1.73 Pass
Opportunities Return on Equity > 15% 4.5% Fail
Valuation Normalized P/E < 20 35.83 Fail
Dividends Current Yield > 2% 11.4 % Pass
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   3 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; stock started paying a dividend in 2008. Total score = number of passes.

With three points, Teekay Tankers hasn't seen its ship come in yet. The oil tanker operator has struggled in a tough industry, but things may be looking up in the near future.

Two years ago, the recession put a big beat-down on oil prices, and the tanker industry followed suit. Weak demand, a lack of supply to ship, and too many tankers competing for too little business pushed tanker rates to decade lows.

But the combination of overall global economic recovery along with geopolitical events has helped pull the industry out of its slump. The Japanese earthquake and tsunami shut down much of Japan's petrochemical industry, increasing demand for medium-range tanker companies like K-Sea Transportation (NYSE: KSP  ) . And while Japan won't affect companies like Teekay Tankers, which have long-range tankers with very large capacity, unrest in Libya could well force U.S. refiners to take more Persian Gulf crude. Increased demand for that crude would help Frontline (NYSE: FRO  ) , Nordic American Tanker (NYSE: NAT  ) , and Teekay Tankers. That's part of the thesis that led one Wall Street firm to upgrade the stock back in March.

The high debt and weak returns on equity associated with the tanker business aren't likely to go away anytime soon, so don't expect perfection from Teekay Tankers. But in the long run, the company could well see conditions improve dramatically from where they are now -- and if that happens, shareholders could see healthy rewards.

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 Teekay Tankers 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. 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2011, at 4:08 PM, gruelan wrote:

    July 19. TNK closed at 8.50,low for the last 12 months in spite of a huge run-up in the market. One wonders about the Fool report of July 16.

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