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 Ship Finance International (NYSE: SFL ) 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 Ship Finance International.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(5.9%)||Fail|
|1-Year Revenue Growth > 12%||12%||Pass|
|Margins||Gross Margin > 35%||72.9%||Pass|
|Net Margin > 15%||44.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||216%||Fail|
|Current Ratio > 1.3||0.86||Fail|
|Opportunities||Return on Equity > 15%||15.9%||Pass|
|Valuation||Normalized P/E < 20||15.57||Pass|
|Dividends||Current Yield > 2%||10.7%||Pass|
|5-Year Dividend Growth > 10%||(6.3%)||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Ship Finance International last year, the company has kept its six-point score. Revenue for the shipping company has rebounded somewhat, and although the stock is down more than 10% over the past year, it has bounced back substantially from its much lower levels near the end of 2011.
The energy boom in the U.S. has been a great boon to many industries. But because more U.S. oil means less need for foreign imports, the oil tanker business has suffered. Both Teekay Tankers (NYSE: TNK ) and Nordic American Tankers (NYSE: NAT ) have seen their shares slump precipitously in light of a glut of vessels and dropping charter rates.
Ship Finance has suffered in particular because of its close relationship with Frontline (NYSE: FRO ) , which has gotten hit very hard by the bad conditions in the industry. Although it was originally spun off as a fully owned subsidiary of Frontline, Ship Finance now operates wholly independently and has worked to get other major customers, with Seadrill (NYSE: SDRL ) now representing a big portion of its business.
Moreover, Ship Finance is taking steps to make the best of a bad situation. New fleet acquisitions include dry bulk and container vessels, with which Ship Finance hopes to diversify its holdings.
Investors have started to get interested in the shipping industry as it appears that policymakers around the world are doing everything they can to encourage economic growth. In order for Ship Finance to build on its recent share bounce-back, it really needs tanker rates to start climbing meaningfully, and for its diversification efforts to bear fruit. That could help it start moving forward toward perfection once again.
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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