Has ConocoPhillips 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 ConocoPhillips (NYSE: COP  ) 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 ConocoPhillips.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

6.8%

Fail

 

1-Year Revenue Growth > 12%

(11.2%)

Fail

Margins

Gross Margin > 35%

22.2%

Fail

 

Net Margin > 15%

4.5%

Fail

Balance Sheet

Debt to Equity < 50%

52.0%

Fail

 

Current Ratio > 1.3

0.91

Fail

Opportunities

Return on Equity > 15%

21.4%

Pass

Valuation

Normalized P/E < 20

5.84

Pass

Dividends

Current Yield > 2%

4.6%

Pass

 

5-Year Dividend Growth > 10%

10.7%

Pass

       
 

Total Score

 

4 out of 10

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

Since we looked at ConocoPhillips last year, the company has dropped two more points, bringing its total score loss since 2010 to three. Falling revenue and rising debt are behind the decline, but the shares have still managed to rise almost 10% over the past year.

The big event for ConocoPhillips this year was its spinoff of Phillips 66 (NYSE: PSX  ) , which included all of the company's refining and distribution assets. As a result, ConocoPhillips going forward will focus on exploration and production, giving up on the integrated business models that ExxonMobil (NYSE: XOM  ) has used to become the giant of the industry and instead doubling down on all the production opportunities around the world.

Yet the exploration and production segment of the energy industry has been a challenging area over the past year, as weaker prices and falling production levels have wrought havoc across the sector. In particular, low natural gas prices have forced Conoco, Chesapeake Energy (NYSE: CHK  ) , and other players in the nat-gas market to reduce output.

In response, Conoco has been selling off existing properties in order to make bigger bets on its most promising plays. For instance, the company sold its 30% stake in the Russian NaryanMarNefteGas to Lukoil recently, as just the latest in a string of sales. Instead, Conoco is putting money into its liquefied natural gas project in Australia to go up against LNG competitor Cheniere Energy (NYSEMKT: LNG  ) and others, as well as prospects for unconventional drilling in Poland, despite Exxon having largely been unsuccessful in its efforts there.

For ConocoPhillips to improve, it needs to have energy prices start moving in the right direction again. Once they do, production levels should start returning to normal, pushing Conoco's metrics upward to regain their recent losses.

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.

With the swelling of the global middle class, energy consumption will skyrocket over the next few decades, and long-term investors know that you want exposure to this space now. We've picked one incredible natural gas company that presents a rare "double-play" investment opportunity today. We're calling it "The One Energy Stock You Must Own Before 2014," and you can uncover it today, totally free, in our premium research report. Click here to read more.

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


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2128415, ~/Articles/ArticleHandler.aspx, 4/17/2014 6:06:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement