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 Sasol (NYSE: SSL ) 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 Sasol.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||9.7%||Fail|
|1-Year Revenue Growth > 12%||20.6%||Pass|
|Margins||Gross Margin > 35%||31.5%||Fail|
|Net Margin > 15%||16.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||14.2%||Pass|
|Current Ratio > 1.3||2.13||Pass|
|Opportunities||Return on Equity > 15%||24.1%||Pass|
|Valuation||Normalized P/E < 20||9.73||Pass|
|Dividends||Current Yield > 2%||4.3%||Pass|
|5-Year Dividend Growth > 10%||16.1%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With eight points, Sasol has done a great job of delivering strong financial results. The stock, though, hasn't put up as good a show, languishing with a small loss over the past year.
Sasol is an integrated energy company headquartered in South Africa. Unlike most of its peers, though, Sasol creates its synthetic energy products using other sources, including coal and natural gas. With shale-based natural gas discoveries taking off, Sasol's technology seems especially well-placed. That's one of the reasons why the company bought half of Talisman Energy's (NYSE: TLM ) interest in the Farrell Creek shale gas area in Canada in late 2010 and followed up with an additional purchase last year.
Moreover, Sasol's location gives it a home-field advantage for developing resources in Africa. In 2009, the company hooked up with Chesapeake Energy (NYSE: CHK ) and Statoil (NYSE: STO ) to try to develop South Africa's Karoo Basin. But actual development has been slow-going despite attempts from competitor Royal Dutch Shell (NYSE: RDS-A ) , which also has holdings in the Karoo, to demonstrate that the South African public wants gas extraction.
Unfortunately, Sasol's biggest growth opportunity hasn't taken off the way many had hoped. With planned coal-to-liquid and gas-to-liquid facilities in the U.S. as well as emerging-market countries China and India, Sasol had expected to ramp up its global presence. So far, though, those plans haven't moved forward at anything close to the pace that investors may once have hoped.
For Sasol to improve, it needs to find ways to bolster its growth prospects. With the entire African continent at its doorstep, Sasol has plenty of opportunity to become a perfect stock in the near future.
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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