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 Total (NYSE: TOT ) 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 Total.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.7%||Fail|
|1-Year Revenue Growth > 12%||18.6%||Pass|
|Margins||Gross Margin > 35%||31.6%||Fail|
|Net Margin > 15%||7.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||46.5%||Pass|
|Current Ratio > 1.3||1.36||Pass|
|Opportunities||Return on Equity > 15%||19.3%||Pass|
|Valuation||Normalized P/E < 20||5.65||Pass|
|Dividends||Current Yield > 2%||5.5%||Pass|
|5-Year Dividend Growth > 10%||4.0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Total last year, the French oil giant has picked up a point. A slight decline in the company's debt level explains the move, but even more interesting are the moves that Total has made over the past year to enhance its role in the energy industry.
Total suffered through a tough 2011. Early last year, unrest in Libya forced the company to cut its oil production from the North African country, hurting its results. It also made an ill-timed investment in solar player SunPower (Nasdaq: SPWR ) , which has plunged as reductions in government subsidies and general glut conditions in the solar market combined to bring the entire sector down sharply.
But Total is still playing to win. It bought a stake in the Utica Shale region from Chesapeake Energy (NYSE: CHK ) recently, giving it exposure to U.S. natural gas. Total also stands to benefit from activity off the coast of Angola, where BP (NYSE: BP ) and Statoil (NYSE: STO ) are among the players that have entered into production-sharing contracts to explore and drill. All three companies are hoping that the pre-salt drilling area proves as rich as a similar one across the Atlantic off the coast of Brazil.
In the long run, Total's future depends on the European sovereign debt crisis lifting and on sustained high energy prices. So far, those two things seem to be going according to plan, and if they continue, then Total could get closer to a perfect 10-point score in the years to come.
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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