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 Buckeye Partners
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 Buckeye Partners.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 59.5% | Pass |
| 1-Year Revenue Growth > 12% | 51.0% | Pass | |
| Margins | Gross Margin > 35% | 12.0% | Fail |
| Net Margin > 15% | 2.3% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 118.2% | Fail |
| Current Ratio > 1.3 | 1.13 | Fail | |
| Opportunities | Return on Equity > 15% | 6.1% | Fail |
| Valuation | Normalized P/E < 20 | 32.81 | Fail |
| Dividends | Current Yield > 2% | 7.3% | Pass |
| 5-Year Dividend Growth > 10% | 5.8% | Fail | |
| Total Score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Buckeye Partners last year, the company has lost a point. The master limited partnership has continued to see huge revenue growth, but earnings haven't kept up, and the shares haven't performed well over the past year.
Buckeye is a master limited partnership that focuses on midstream operations, with pipeline and storage facilities throughout the U.S. for refined petroleum products. Pipeline companies have been a particularly hot area this year, as Kinder Morgan's big buyout of El Paso
Earlier this year, Buckeye made a big acquisition of its own, buying a marine terminal in New York Harbor from Chevron
Buckeye pays a hefty dividend, but with fairly high debt levels, it's unclear whether Buckeye can grow its way into a more promising future on its own. Continuing growth in the industry could help Buckeye, but a buyout from a bigger player seeking to consolidate might come at exactly the right time for shareholders looking for an easy exit.
Keep searching
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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