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 Flotek Industries (NYSE: FTK ) 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 Flotek.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||22.6%||Pass|
|1-Year Revenue Growth > 12%||86.4%||Pass|
|Margins||Gross Margin > 35%||39.6%||Pass|
|Net Margin > 15%||1.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||133.3%||Fail|
|Current Ratio > 1.3||4.02||Pass|
|Opportunities||Return on Equity > 15%||8.1%||Fail|
|Valuation||Normalized P/E < 20||12.15||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of five, Flotek gets investors about halfway to where they want to be. With new energy plays across the country, the oil services company finds itself in high demand -- but it faces the challenge of how best to profit from it.
Just about every corner of the energy industry has seen amazing growth in the past several years, as high oil prices make unconventional energy plays economically viable. Even some of the giants among oil services companies, including Schlumberger (NYSE: SLB ) , Baker Hughes (NYSE: BHI ) , and Weatherford (NYSE: WFT ) , have put in amazing revenue growth since 2006 and should continue to do well as long as oil stays expensive.
By comparison, Flotek is a bit player in the industry. But with environmental concerns about hydraulic fracturing, the tiny company has a couple of aces in the hole. First, it has expanding opportunities overseas in places like Russia. More importantly, though, is Flotek's unique environmentally friendly fracking fluid, which it makes from citrus. With companies like Range Resources (NYSE: RRC ) going out of their way to prove to local landowners that fracking can be safe -- and others such as Cabot Oil & Gas (NYSE: COG ) drawing scorn for failing to do so -- Flotek's products should continue to gain in popularity.
With shares at reasonable valuations, Flotek should focus on getting its margins up. If it can do so, it should be able to work on reducing debt. That combination could get Flotek a lot closer to perfection in the years ahead.
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."