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 Teekay Tankers
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 Teekay Tankers.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (0.2%) | Fail |
| 1-Year Revenue Growth > 12% | (19.8%) | Fail | |
| Margins | Gross Margin > 35% | 64.1% | Pass |
| Net Margin > 15% | 13.5% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 67.6% | Fail |
| Current Ratio > 1.3 | 1.73 | Pass | |
| Opportunities | Return on Equity > 15% | 4.5% | Fail |
| Valuation | Normalized P/E < 20 | 35.83 | Fail |
| Dividends | Current Yield > 2% | 11.4 % | Pass |
| 5-Year Dividend Growth > 10% | NM | NM | |
| Total Score | 3 out of 9 |
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; stock started paying a dividend in 2008. Total score = number of passes.
With three points, Teekay Tankers hasn't seen its ship come in yet. The oil tanker operator has struggled in a tough industry, but things may be looking up in the near future.
Two years ago, the recession put a big beat-down on oil prices, and the tanker industry followed suit. Weak demand, a lack of supply to ship, and too many tankers competing for too little business pushed tanker rates to decade lows.
But the combination of overall global economic recovery along with geopolitical events has helped pull the industry out of its slump. The Japanese earthquake and tsunami shut down much of Japan's petrochemical industry, increasing demand for medium-range tanker companies like K-Sea Transportation
The high debt and weak returns on equity associated with the tanker business aren't likely to go away anytime soon, so don't expect perfection from Teekay Tankers. But in the long run, the company could well see conditions improve dramatically from where they are now -- and if that happens, shareholders could see healthy rewards.
Keep searching
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.
Click here to add Teekay Tankers to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
