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 Devon Energy (NYSE: DVN ) 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 Devon Energy.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.7%)||Fail|
|1-Year Revenue Growth > 12%||9.8%||Fail|
|Margins||Gross Margin > 35%||66.3%||Pass|
|Net Margin > 15%||47.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||43.9%||Pass|
|Current Ratio > 1.3||1.59||Pass|
|Opportunities||Return on Equity > 15%||10.5%||Fail|
|Valuation||Normalized P/E < 20||10.32||Pass|
|Dividends||Current Yield > 2%||1.1%||Fail|
|5-Year Dividend Growth > 10%||9.9%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of 5, Devon Energy gets about halfway to perfection. Like many of its peers, the oil and gas company is going through a major transformation.
Until recently, Devon had a wide range of assets around the world. From Brazil to Azerbaijan and China to the Gulf of Mexico, Devon had its fingers in a variety of projects. But just as peers SandRidge Energy (NYSE: SD ) , EOG Resources (NYSE: EOG ) , and Chesapeake Energy (NYSE: CHK ) have made moves to focus on more lucrative opportunities in the energy industry, so, too, has Devon decided to do an about-face from its past strategy in an attempt to capitalize on its best prospects.
Specifically, Devon made the strategic decision to sell off all its international assets to focus on its rich array of onshore North American plays, finding buyers including BP (NYSE: BP ) and Apache (NYSE: APA ) . Even as production has grown from 168 million barrels (oil equivalent) in 2006 to 223 million last year, Devon has found new reserves to replace that production at an even faster rate. And with stakes in Alberta's oil sands, established shale plays like the Barnett and Woodford regions, and newer ventures including the Niobrara, Tuscaloosa, and Mississippian areas, Devon certainly isn't suffering from lack of opportunity.
With an experienced management team and strong asset diversity, there's every reason for investors to think that Devon's big gamble will succeed. Given its success even with natural gas prices behaving poorly, this stock could give shareholders a gusher if gas follows crude oil's lead higher.
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."