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 Linn Energy
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 Linn Energy.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||69.5%||Pass|
|1-Year Revenue Growth > 12%||72.4%||Pass|
|Margins||Gross Margin > 35%||77%||Pass|
|Net Margin > 15%||(47.8%)||Fail|
|Balance Sheet||Debt to Equity < 50%||101.8%||Fail|
|Current Ratio > 1.3||1.39||Pass|
|Opportunities||Return on Equity > 15%||(15.4%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||7.6%||Pass|
|5-Year Dividend Growth > 10%||30%||Pass|
|Total Score||6 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.
When we looked at Linn Energy last year, it had a score of five, so the company has gotten a point closer to perfection. It is still seeing net losses, and net margins actually got worse in the past year despite strong revenue growth. But there's more to the story than those numbers suggest.
Linn Energy was one of the darlings of the recovery after the market meltdown in early 2009. Investors essentially left the oil and gas exploration company for dead during the worst of the credit crunch, but once Linn secured long-term pricing, they gained more confidence in the company's future prospects.
More recently, though, the company has struggled. Linn has missed analyst estimates in three of the four past quarters, including a big 23% shortfall last quarter. That's very similar to the experiences of Kinder Morgan Energy Partners
It's important to understand that with master limited partnerships like Linn Energy, GAAP earnings and margins figures don't always tell the complete story. For many, the stock's extremely attractive dividend yield, which falls short of peers like Cheniere Energy
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.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.