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 ExxonMobil (NYSE: XOM ) 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 ExxonMobil.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.9%||Fail|
|1-Year Revenue Growth > 12%||28.4%||Pass|
|Margins||Gross Margin > 35%||30.7%||Fail|
|Net Margin > 15%||9.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||10.3%||Pass|
|Current Ratio > 1.3||0.93||Fail|
|Opportunities||Return on Equity > 15%||26.9%||Pass|
|Valuation||Normalized P/E < 20||9.82||Pass|
|Dividends||Current Yield > 2%||2.2%||Pass|
|5-Year Dividend Growth > 10%||7.8%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at ExxonMobil last year, the oil giant has kept the same five-point score. A big jump in revenue over the past year came on the heels of high oil prices, but surprisingly, the company has an even more attractive valuation than it did when 2011 began.
ExxonMobil is a world power in oil. With operations around the globe, the company has a presence in nearly every market worth competing in. For instance, Exxon has jumped into the liquefied natural gas industry, planning a facility in Papua New Guinea that will compete directly with InterOil (NYSE: IOC ) and also (to some extent) with ConocoPhillips (NYSE: COP ) and its planned LNG export terminal in Australia. The move validates Exxon's purchase of XTO Energy a few years ago and could do a lot to turn around rock-bottom natural gas prices in the U.S. recently.
The question, though, is whether the world will remain a safe place for Exxon. Although French peer Total (NYSE: TOT ) suffered greatly from Libya's spring uprising last year, Exxon has largely avoided recent turmoil in the Middle East. But with the company still trying to recover billions of dollars from its nationalized holdings in Venezuela, Exxon knows all too well what dangers lie in the geopolitical shifts it constantly has to navigate.
Both Exxon and fellow U.S. giant Chevron (NYSE: CVX ) have diversified their energy portfolios to try to ensure that they can thrive in any environment. But for ExxonMobil to get closer to perfection, it needs to focus on giving more back to shareholders in the form of dividends, as well as doing what it can to boost margins in a tough commodity business. With a possible global recovery coming, those things are all reasonable expectations for ExxonMobil in the year ahead.
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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