Has Golar LNG Become the Perfect Stock?

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 Golar LNG (Nasdaq: GLNG  ) 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 Golar LNG.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.6% Fail
  1-Year Revenue Growth > 12% 22.9% Pass
Margins Gross Margin > 35% 77.0% Pass
  Net Margin > 15% 15.6% Pass
Balance Sheet Debt to Equity < 50% 163.6% Fail
  Current Ratio > 1.3 0.41 Fail
Opportunities Return on Equity > 15% 10.1% Fail
Valuation Normalized P/E < 20 60.99 Fail
Dividends Current Yield > 2% 3.8% Pass
  5-Year Dividend Growth > 10%                     (8.3%) Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Golar LNG last year, the company has gained a point. Low prices for natural gas have made the prospects of transporting liquefied natural gas around the world much more economically viable, yet after soaring in 2011, Golar's stock has given up a lot of its gains so far this year.

Golar's success in 2011 came largely by pouncing on a huge opportunity. In the wake of Japan's earthquake and tsunami, the need for fuels to generate electricity to replace lost nuclear power capacity made LNG highly in demand, and Golar's fleet of 13 vessels helped provide much-needed supplies.

More generally, plans to expand LNG production are going on around the world, which should help boost the need for LNG transportation. With Cheniere Energy (NYSE: LNG  ) and its Sabine Pass subsidiary working to build an LNG export terminal on the Texas-Louisiana border, while Encana (NYSE: ECA  ) , EOG Resources (NYSE: EOG  ) , and Apache are all trying to get infrastructure in place for LNG export from Canada's west coast.

The main concern for Golar shareholders, however, has to be valuation. Compared to rival Teekay LNG Partners (NYSE: TGP  ) , Golar shares look extremely expensive -- yet Teekay arguably is in better position to ramp up for higher demand as it comes into the market.

Golar needs to work on boosting returns on equity to match its recent spike in net margin. Over the long haul, Golar's march to perfection won't come unless investors beat down the shares and give outsiders a buying opportunity to get in at cheaper levels.

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.

If you think energy is the place to be, we've got a stock idea that could knock your socks off. 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, so click here today.

Click here to add Golar LNG to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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