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 Petroleo Brasileiro (NYSE: PBR ) 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 Petrobras.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.5%||Fail|
|1-Year Revenue Growth > 12%||36.1%||Pass|
|Margins||Gross Margin > 35%||38.2%||Pass|
|Net Margin > 15%||16.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||44.3%||Pass|
|Current Ratio > 1.3||1.78||Pass|
|Opportunities||Return on Equity > 15%||12.2%||Fail|
|Valuation||Normalized P/E < 20||10.85||Pass|
|Dividends||Current Yield > 2%||3.2%||Pass|
|5-Year Dividend Growth > 10%||6.3%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Petrobras last year, the Brazilian oil giant has maintained its seven-point score. Dividend growth has slowed, but sales picked up nicely in the past year as the company starts to cash in on some lucrative finds in recent years.
The Santos Basin off the coast of Brazil has seen some big discoveries in recent years. About a third of newly discovered oil finds during the past five years have come from Brazil's offshore resources. Although ExxonMobil (NYSE: XOM ) and Chevron (NYSE: CVX ) have made forays into the region, both have had challenges. Exxon hit dry wells early last year, while Chevron had a small oil spill that ballooned into a multibillion-dollar issue for the company. Moreover, Petrobras enjoys favored legal status that keeps it as lead operator in major deepwater exploration and production.
In order to make those fields produce, Petrobras is ramping up its internal infrastructure. National Oilwell Varco (NYSE: NOV ) is working on equipment for seven drillships that Petrobras will use to explore its deepwater holdings. Moreover, last year, DryShips (Nasdaq: DRYS ) signed a contract for ultra-deepwater ships that Petrobras will use over the next three years, and it's likely that Petrobras will maintain a strong relationship with DryShips' now-spun-off Ocean Rig subsidiary.
As long as high oil prices persist, then Petrobras should continue to see strength in its stock. The main concern is a potential slowdown in the Brazilian economy, but with shares at relatively low multiples, some of that risk is already priced into the stock. With just a slight boost in a few key metrics, Petrobras could reach perfection in the near future.
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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