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 BP Prudhoe Bay (NYSE:BPT) 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 BP Prudhoe Bay.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

4.5%

Fail

 

1-year revenue growth > 12%

(0.3%)

Fail

Margins

Gross margin > 35%

100%

Pass

 

Net margin > 15%

99.4%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

5.00

Pass

Opportunities

Return on equity > 15%

NM

NM

Valuation

Normalized P/E < 20

12.57

Pass

Dividends

Current yield > 2%

9.9%

Pass

 

5-year dividend growth > 10%

4.3%

Fail

       
 

Total score

 

6 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negligible shareholder equity. Total score = number of passes.

Since we looked at BP Prudhoe Bay last year, the royalty trust has lost a point, as revenue flat-lined. But shares have lost a third of their value as investors became more aware of the peculiar provisions of this investment.

Royalty trusts have gotten much more commonplace in recent years, as oil and gas producers seek to give investors tailored exposure to particular plays in order to spread their risk. For instance, SandRidge Energy (NYSE:SD) has created numerous trusts, including the SandRidge Mississippian Trust I (NYSE:SDT) focusing on the Mississippian Lime and SandRidge Permian Trust (NYSE:PER) covering its Permian Basin properties. In BP Prudhoe Bay's case, the trust covers assets on the North Slope of Alaska.

Royalty trusts often make attractive distributions, and BP Prudhoe Bay stands head and shoulders above San Juan Basin Royalty Trust (NYSE:SJT) and some other peers. But unlike most companies, royalty trusts typically have expiration dates beyond which investors won't get any further payouts, or other restrictions on future distributions that give trusts a limited lifespan. When financial analysts reminded investors of that fact over the summer, BP Prudhoe Bay shares plunged 30%, as many investors likely realized for the first time that eventually, the shares they owned would be worthless.

For now, though, BP Prudhoe Bay's dividends have held up well. Despite making a slightly smaller payout in October than it did the previous year, the trust's 2012 distributions add up to just a 1% decline compared to 2011.

For BP Prudhoe Bay to improve, it needs to see improved energy prices and production levels. Without that, investors may never let the trust's shares rise to their former levels ever again.

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.

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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.