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 SeaDrill (NYSE: SDRL ) 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 SeaDrill.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||39.9%||Pass|
|1-Year Revenue Growth > 12%||16.1%||Pass|
|Margins||Gross Margin > 35%||58.7%||Pass|
|Net Margin > 15%||41.4%||Pass|
|Balance Sheet||Debt to Equity < 50%||145.6%||Fail|
|Current Ratio > 1.3||0.77||Fail|
|Opportunities||Return on Equity > 15%||31.4%||Pass|
|Valuation||Normalized P/E < 20||22.52||Fail|
|Dividends||Current Yield > 2%||8.3%||Pass|
|5-Year Dividend Growth > 10%||34.5%*||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Since first dividend in the fourth quarter of 2007.
Since we looked at SeaDrill last year, the drilling specialist has lost a point, with its valuation creeping upward. But even at a fairly high price tag, SeaDrill is performing extremely well and has plenty of future promise.
The drilling industry got hit hard by the BP oil spill and the resulting cascade of regulatory scrutiny over deepwater drilling. Transocean (NYSE: RIG ) , which was obviously at the epicenter of the Gulf oil spill controversy, blamed new safety regulations for a drop in revenue and for its posting a net loss in its most recent quarter.
Yet SeaDrill has avoided that downdraft, posting sales and operating profit gains in its last quarterly report. One reason is that so many companies need the ultra-deepwater rigs that SeaDrill and DryShips (Nasdaq: DRYS ) spinoff Ocean Rig UDW provide. SeaDrill counts major oil players Statoil (NYSE: STO ) and Total (NYSE: TOT ) as customers in drilling locations around the world, as its rigs help those companies with their holdings from the North Sea to the west coast of Africa and elsewhere. That geographic diversity helps prevent local events like the Gulf oil spill from having too dramatic an impact on results.
As long as $100 oil lasts, SeaDrill will benefit from the huge demand for its rigs. With an 8% dividend yield and a payout that has grown quickly, SeaDrill deserves a place among the best energy stocks out there. That's why I'm making a CAPScall on SeaDrill to outperform the market over the next five years.
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.
SeaDrill may be a great stock, but it's not the only one. For more strong ideas, I'd suggest taking a look at the Fool's latest special report absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.
Click here to add SeaDrill to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.