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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 Occidental Petroleum (NYSE: OXY ) 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 Occidental Petroleum.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||5.8%||Fail|
|1-year revenue growth > 12%||27.1%||Pass|
|Margins||Gross margin > 35%||68.8%||Pass|
|Net margin > 15%||27.6%||Pass|
|Balance Sheet||Debt to equity < 50%||12.1%||Pass|
|Current ratio > 1.3||1.23||Fail|
|Opportunities||Return on equity > 15%||17.1%||Pass|
|Valuation||Normalized P/E < 20||12.36||Pass|
|Dividends||Current yield > 2%||1.9%||Fail|
|5-year dividend growth > 10%||18.3%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Occidental Petroleum last year, the company has kept its score stable. Stronger returns on equity offset a drop in the oil company's current ratio.
Occidental is a large player in the oil and gas industry, even though it doesn't get the same spotlight as the major integrated oil giants. But Occidental has become the largest player in enhanced oil recovery, which involves buying up already-existing wells and using updated recovery methods to get more oil. Occidental and Denbury Resources (NYSE: DNR ) have both found profitable opportunities with enhanced oil recovery. In part, that explains how Occidental has increased sales far faster than ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) in the past year.
Since last year's look at the company, Occidental bought substantial interest in North Dakota's Bakken oil play. Joining Williams Cos. (NYSE: WMB ) and Hess (NYSE: HES ) in the area, Occidental's expertise as the largest gas producer in California should help it make the most of the opportunity.
For Occidental to improve further, all it needs is for energy prices to rise and to keep pushing its dividend higher. If it gets those favorable tailwinds, then Occidental could well become a truly perfect stock.
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 Occidental Petroleum 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."