Is Noble Energy 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 Noble Energy (NYSE: NBL  ) 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 Noble Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-tear annual revenue growth > 15%

3.7%

Fail

 

1-year revenue growth > 12%

17%

Pass

Margins

Gross margin > 35%

82.1%

Pass

 

Net margin > 15%

18.3%

Pass

Balance sheet

Debt to equity < 50%

39.4%

Pass

 

Current ratio > 1.3

1.54

Pass

Opportunities

Return on equity > 15%

8.6%

Fail

Valuation

Normalized P/E < 20

35.23

Fail

Dividends

Current yield > 2%

1%

Fail

 

5-year dividend growth > 10%

26.2%

Pass

 

 

 

 

 

Total Score

 

6 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With six points, Noble Energy is poised to make a run at perfection. The driller is trying to expand at a crucial moment for the energy markets, but if all goes well, then it could be well poised to profit from continued strength in the industry.

As a drilling company with operations in the Gulf of Mexico, Noble Energy got hit hard by the BP oil spill last year. After nearly a year of downtime in the region, Noble Energy got the first permit of 2011 to restart a deepwater well off the coast of Louisiana.

Now, a lot will depend on how much the company can make up for lost time in the Gulf. Lately, weather threats have caused problems, as Tropical Storm Lee caused rivals Hercules Offshore (Nasdaq: HERO  ) , Transocean (NYSE: RIG  ) , and Seadrill (NYSE: SDRL  ) to evacuate their production platforms over the Labor Day weekend. But yesterday, Hercules and ATP Oil & Gas (Nasdaq: ATPG  ) both jumped more than 10% on news that activity would resume, and Noble Energy also saw more modest gains.

Yet Noble isn't confined to the deep water. Along with Anadarko Petroleum (NYSE: APC  ) and Chesapeake Energy (NYSE: CHK  ) , the company also has significant acreage in the Niobrara region of Wyoming and Colorado. Despite some uncertainties about the region, players are optimistic about its prospects.

For Noble to reach perfection, it will need to see success in every aspect of its business. If oil prices stay relatively high and gas prices recover, then that would help get the company on its way.

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 Noble Energy 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. The Motley Fool owns shares of Transocean. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Hercules Offshore. 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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