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 National Oilwell Varco (NYSE: NOV ) 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 National Oilwell Varco.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||17.3%||Pass|
|1-Year Revenue Growth > 12%||5.3%||Fail|
|Margins||Gross Margin > 35%||31.1%||Fail|
|Net Margin > 15%||13.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||3.0%||Pass|
|Current Ratio > 1.3||2.64||Pass|
|Opportunities||Return on Equity > 15%||10.9%||Fail|
|Valuation||Normalized P/E < 20||14.88||Pass|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||4 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; National Oilwell Varco started paying a dividend in Nov. 2009. Total score = number of passes.
With four points, National Oilwell Varco still has plenty of room to improve. But the oil services company has plenty of things going for it, and the recent swoon in the markets has made its shares look pretty cheap.
National Oilwell Varco is the invisible force behind the entire energy industry. The company supplies everything from floating rigs to the small tools that companies need to drill successfully for oil and gas. Although the company has plenty of competitors in the space, including Schlumberger (NYSE: SLB ) and McDermott (NYSE: MDR ) , more than 90% of the world's rigs have National Oilwell Varco equipment on them. And with Petrobras (NYSE: PBR ) and BP (NYSE: BP ) enjoying new discoveries recently, new orders could keep the company busy for quite a while.
In fact, just last month, National Oilwell Varco got an order worth $1.5 billion -- the biggest in its 150-year history. At a time when refiners Valero (NYSE: VLO ) and HollyFrontier (NYSE: HFC ) are suffering from fears of lower energy costs, this order will give National Oilwell Varco a hefty backlog even if tough times are coming.
National Oilwell Varco isn't close to perfection just yet. But if the company keeps its eye on the ball and the economic cycle doesn't smack down oil prices, then it could easily boost its score in the years to come.
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.