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 National Oilwell Varco (NYSE: NOV ) 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 National Oilwell Varco.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||15.2%||Pass|
|1-Year Revenue Growth > 12%||32.7%||Pass|
|Margins||Gross Margin > 35%||29.4%||Fail|
|Net Margin > 15%||13.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||7.6%||Pass|
|Current Ratio > 1.3||2.01||Pass|
|Opportunities||Return on Equity > 15%||12.9%||Fail|
|Valuation||Normalized P/E < 20||16.49||Pass|
|Dividends||Current Yield > 2%||0.6%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; National Oilwell Varco started paying a dividend in Nov. 2009. Total score = number of passes.
Since we looked at National Oilwell Varco last year, the company has picked up a point, with revenue growth accelerating substantially in the past year. Shareholders also have reason to celebrate, as the stock has risen about 35% over the past year.
National Oilwell has cashed in on the huge boom in the energy sector. As a major supplier to offshore drillers, the company has amassed a huge backlog of $11 billion, and is attracting big new orders every quarter. With Seadrill (NYSE: SDRL ) and Transocean (NYSE: RIG ) aggressively moving to expand deepwater and ultra-deepwater rig counts because of higher day rates, National Oilwell has plenty of projects to provide key materials.
But National Oilwell is also an important source for land-based operators. With derricks, pipe, and support systems like pipe-handling equipment, the company is a one-stop shop for exploration and production companies of all sizes. It dominates its industry, with Cameron International (NYSE: CAM ) sporting less than half of National Oilwell's revenue and having much lower margins as well.
National Oilwell has also been opportunistic. Last month, the company bought out rival Robbins & Myers (NYSE: RBN ) for $2.5 billion, taking the chance to reduce competition at only a 28% premium to the share price immediately before the bid. With the deal expected to be accretive to earnings in 2013, National Oilwell could still have more room to run.
For National Oilwell to improve, it needs to get its margins back up just a touch and then work on trying to boost its dividend. As long as energy prices stay high, though, National Oilwell Varco has a lot of potential to become a perfect stock in the long run.
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.
National Oilwell Varco has plenty of potential, but Seadrill may have even more possibilities for profit. Read all about the deepwater specialist in the Fool's new premium report on Seadrill. Want to know more? Click here.
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