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 Schlumberger (NYSE: SLB ) 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 Schlumberger.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.7%||Fail|
|1-Year Revenue Growth > 12%||37.1%||Pass|
|Margins||Gross Margin > 35%||21.5%||Fail|
|Net Margin > 15%||14.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||27.2%||Pass|
|Current Ratio > 1.3||1.75||Pass|
|Opportunities||Return on Equity > 15%||17.7%||Pass|
|Valuation||Normalized P/E < 20||35.43||Fail|
|Dividends||Current Yield > 2%||1.2%||Fail|
|5-Year Dividend Growth > 10%||14.9%||Pass|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With five points, Schlumberger finishes in the middle of the pack. The oil services company is at the top of its industry, and while there may be storm clouds on the horizon, things are good for the energy business right now.
When people think of energy, they tend to focus on the names they see on their local gas stations. But behind every Big Oil stock is a company that provides the materials and operational support to help wells get dug and oil pumped. Schlumberger is by far the largest in the oil services industry, making even well-known competitors Halliburton (NYSE: HAL ) , Baker Hughes (NYSE: BHI ) , and Weatherford (NYSE: WFT ) look small by comparison.
As you'd expect, Schlumberger is vulnerable to the movements of the oil market. As the company saw in its most recent quarter, factors ranging from political unrest and weather complications to regulatory scrutiny and fluctuating energy prices can have a huge impact on its results. Yet Schlumberger sees temporary problems like the loss of Libyan production as an opportunity to open new doors in the Middle East.
Another thing that makes Schlumberger stand out is its dividend. At 1.2%, the stock's yield isn't very high, but the company has taken steps to increase it substantially in recent years. In contrast, Schlumberger's competitors have been slow to raise their smaller payouts.
Oil services will always be a volatile industry, but as its leader, Schlumberger doesn't need top prices to make solid profits. As long as the bottom doesn't drop out of the oil market -- something that doesn't seem likely anytime soon -- Schlumberger should be able to keep delivering consistent, if not perfect, results for its shareholders.
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."