Has TransCanada 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 TransCanada (NYSE: TRP  ) 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 TransCanada.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

1.1%

Fail

 

1-Year Revenue Growth > 12%

17.2%

Pass

Margins

Gross Margin > 35%

50.3%

Pass

 

Net Margin > 15%

15.4%

Pass

Balance Sheet

Debt to Equity < 50%

116.4%

Fail

 

Current Ratio > 1.3

0.54

Fail

Opportunities

Return on Equity > 15%

8.3%

Fail

Valuation

Normalized P/E < 20

27.40

Fail

Dividends

Current Yield > 2%

4%

Pass

 

5-Year Dividend Growth > 10%

5.4%

Fail

       
 

Total Score

 

4 out of 10

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

Since we looked at TransCanada last year, the company has kept its four-point score. But the shares are up nearly 15% over the past year as the company boosted revenue considerably.

TransCanada is best known for its notorious Keystone pipeline, which generated so much controversy over the proposed Keystone XL extension. But an equally big if not bigger opportunity for TransCanada will come from converting its Mainline gas pipeline to allow transportation of crude from oil-rich areas like the Albertan Oil Sands and the Bakken. Kinder Morgan (NYSE: KMI  ) has a pipeline from the oil sands region to the British Columbia coast and Enbridge (NYSE: ENB  ) is trying to build its Northern Gateway pipeline project as an alternative for westward movement, but the East Coast market offers TransCanada a chance to move crude into areas that currently rely largely on higher-priced Brent oil.

But the natural gas boom in the United States continues to put a damper on TransCanada's current business. With Enterprise Products Partners (NYSE: EPD  ) and Spectra Energy (NYSE: SE  ) joining Kinder Morgan and other peers in jumping onto the midstream bandwagon to serve budding unconventional gas discoveries across the U.S., TransCanada's services aren't as essential as they once were. TransCanada will have to push hard in order to stay competitive in the increasingly cutthroat industry.

In its most recent quarter, TransCanada beat earnings estimates, although low natural gas prices and fairly weak demand held the company back somewhat. But the company's big plans to increase its midstream portfolio in the coming years made investors even more optimistic. With spending of $10 billion more between now and the end of 2015 expected to link the Gulf Coast and the Canadian Maritimes to its existing network, TransCanada is building out its asset base impressively.

For TransCanada to improve, it needs its long-term strategic plans to stay on track. If gas prices start to rise, then the company could get a big boost much sooner on its path to perfection.

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.

The surge in oil and natural gas production from hydraulic fracturing and horizontal drilling is creating massive bottlenecks in takeaway capacity. However, this problem for producers creates a massive and immensely profitable opportunity for midstream companies. Energy Transfer Partners helps alleviate the gluts in supply with 23,500 miles of transformational pipelines. To see if ETP and its industry-leading yield will be a fit for you, click on this detailed premium report, which will supply you with a thorough analysis of this attractive midstream.

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


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