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 Marathon Oil (NYSE: MRO ) 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 Marathon Oil.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(24.5%)||Fail|
|1-Year Revenue Growth > 12%||(78.1%)||Fail|
|Margins||Gross Margin > 35%||56.0%||Pass|
|Net Margin > 15%||20.0%||Pass|
|Balance Sheet||Debt to Equity < 50%||30.1%||Pass|
|Current Ratio > 1.3||1.73||Pass|
|Opportunities||Return on Equity > 15%||8.4%||Fail|
|Valuation||Normalized P/E < 20||7.59||Pass|
|Dividends||Current Yield > 2%||2.2%||Pass|
|5-Year Dividend Growth > 10%||(2.1%)||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Marathon Oil last year, the oil company has picked up two points. Yet the current score really doesn't compare with last year's numbers because of the ensuing spinoff of Marathon's refining operations, which have deflated total revenue substantially and contributed to a drop in dividend payments.
Marathon joined the growing number of energy companies breaking up their assets into separately traded companies, with its Marathon Petroleum (NYSE: MPC ) spinoff happening last year. With downstream operations like refining so operationally different from upstream exploration and production activity, separating the businesses makes sense -- enough that ConocoPhillips (NYSE: COP ) plans to follow suit in the near future.
Yet Marathon also had other challenges to overcome beyond the spinoff. The uprising in Libya early in 2011 forced Total (NYSE: TOT ) , Eni (NYSE: E ) , and Marathon to shut down production there for safety concerns. That hurt results at all three companies for months, and with Marathon and the others always exploring in geopolitically unstable areas of the world, there's no guarantee that similar episodes won't occur in the future.
Nevertheless, Marathon is aiming higher. With big growth initiatives in the Bakken and Eagle Ford areas, Marathon plans to tap into the unconventional opportunities there. The company also plans to spend money on maintaining and building up its international operations.
Marathon's numbers should naturally improve as it recovers from its breakup. If oil prices stay high, then Marathon should be well-poised to capitalize moving forward.
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.
If you like Marathon, we think you'll love this energy company. Read about it right here in the Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time.
Click here to add Marathon Oil to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.