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 HollyFrontier (NYSE: HFC ) 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 HollyFrontier.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||30.9%||Pass|
|1-Year Revenue Growth > 12%||85.5%||Pass|
|Margins||Gross Margin > 35%||13.0%||Fail|
|Net Margin > 15%||6.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||21.8%||Pass|
|Current Ratio > 1.3||1.77||Pass|
|Opportunities||Return on Equity > 15%||29.8%||Pass|
|Valuation||Normalized P/E < 20||5.04||Pass|
|Dividends||Current Yield > 2%||1.2%||Fail|
|5-Year Dividend Growth > 10%||18.4%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
We looked at Holly last year before the merger with Frontier Oil, and it scored just three points. Since the merger, margins and profitability have improved, debt/equity ratios have decreased, and the dividend has increased substantially.
Refiners in the western half of the U.S. are seeing a lot of strength in the current environment. With all the new oil production activity in various oil fields in the West, Western Refining (NYSE: WNR ) , Tesoro (NYSE: TSO ) , and HollyFrontier all have the geographical advantage of having their facilities close to crude oil sources. That stands in stark contrast to East Coast refiners Sunoco (NYSE: SUN ) and ConocoPhillips (NYSE: COP ) , which have tried to sell their facilities due to the expensive prices for imported Brent crude.
The merger especially helped HollyFrontier, as the Kansas and Oklahoma refineries that Holly picked up from Frontier were able to take advantage of the spread between prices of Brent crude versus West Texas Intermediate. That spread has bounced around a lot but is still reasonably high.
HollyFrontier suffered a setback last week, though, as its earnings came in below expectations. But the company is looking for ways to boost profits, including a possible expansion of its Utah refinery to produce more diesel fuel.
HollyFrontier should continue to benefit from the current pricing environment for crude and refined products. With its shares at extremely cheap levels, those interested in energy investments may never have a better time to pick up the stock.
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 the best investments from the rest.
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