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 ATP Oil & Gas
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 ATP Oil & Gas.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 14.1% | Fail |
| 1-year revenue growth > 12% | 75.7% | Pass | |
| Margins | Gross margin > 35% | 77.8% | Pass |
| Net margin > 15% | (57.4%) | Fail | |
| Balance sheet | Debt to equity < 50% | 647.1% | Fail |
| Current ratio > 1.3 | 0.55 | Fail | |
| Opportunities | Return on equity > 15% | (77.3%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 2 out of 9 |
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
Since we looked at ATP Oil & Gas last year, the drilling company has lost a point as its long-term revenue history reflected a slowdown. But with the Gulf of Mexico still reeling from the after-effects of the 2010 oil spill, the company needs to get moving and start producing the potential that investors see in it.
Deepwater drilling is a lucrative niche, one which ATP's Titan rig aims to take advantage of. The business has been so successful lately that players Seadrill
For ATP, though, its highly leveraged balance sheet forces the company to face the huge challenge of managing its massive debt obligations. Although the company has repeatedly said it doesn't plan to miss any payments, delays from the Gulf drilling moratorium pushed back its production schedule.
Given its difficulties in managing its finances, the most likely scenario for ATP may be a buyout. Both ExxonMobil
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.
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