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 (NYSE: BP ) 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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.2%||Fail|
|1-Year Revenue Growth > 12%||26.4%||Pass|
|Margins||Gross Margin > 35%||15.4%||Fail|
|Net Margin > 15%||6.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||39.3%||Pass|
|Current Ratio > 1.3||1.16||Fail|
|Opportunities||Return on Equity > 15%||25.0%||Pass|
|Valuation||Normalized P/E < 20||5.76||Pass|
|Dividends||Current Yield > 2%||4.5%||Pass|
|5-Year Dividend Growth > 10%||(5.9%)||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at BP last year, the oil giant has picked up two points. A big boost in returns on equity led to positive net income, and the shares are valued attractively at current levels.
BP is still living with the aftermath of the Gulf oil spill that occurred two years ago. Last month, just before a case against BP was set to go to trial, the company proposed a $7.8 billion settlement with private plaintiffs. The settlement should go before a judge later this month, leaving only government claims against BP and peers Transocean (NYSE: RIG ) and Halliburton (NYSE: HAL ) , which were involved in the spill and therefore could also potentially be liable.
But BP isn't letting the Gulf tragedy hold it back from pursuing other opportunities. The company holds exploration licenses for potential Arctic drilling off the coast of Canada, although a review has the permitting process on hold for now. In addition, BP has joined peers Statoil (NYSE: STO ) and Total (NYSE: TOT ) in aiming to tap the pre-salt oil fields off the coast of Angola, which could prove to be as massive as those discovered across the Atlantic off the Brazilian coast.
After having cut its dividend in half following the spill, BP restored a small part of the loss with a dividend increase earlier this year. It's hard to complain about its 4.5% yield, but the payout is still a far cry from where it stood two years ago -- even when shares traded only marginally higher than where they are now.
For BP to keep improving, it needs to keep revenue growth steady and put the Gulf disaster behind it. As long as energy prices stay healthy, BP should be able to recover and resume its march toward perfection.
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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