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 Buckeye Partners (NYSE: BPL) 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 Buckeye Partners.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 59.5% Pass
  1-Year Revenue Growth > 12% 51.0% Pass
Margins Gross Margin > 35% 12.0% Fail
  Net Margin > 15% 2.3% Fail
Balance Sheet Debt to Equity < 50% 118.2% Fail
  Current Ratio > 1.3 1.13 Fail
Opportunities Return on Equity > 15% 6.1% Fail
Valuation Normalized P/E < 20 32.81 Fail
Dividends Current Yield > 2% 7.3% Pass
  5-Year Dividend Growth > 10% 5.8% Fail
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Buckeye Partners last year, the company has lost a point. The master limited partnership has continued to see huge revenue growth, but earnings haven't kept up, and the shares haven't performed well over the past year.

Buckeye is a master limited partnership that focuses on midstream operations, with pipeline and storage facilities throughout the U.S. for refined petroleum products. Pipeline companies have been a particularly hot area this year, as Kinder Morgan's big buyout of El Paso (NYSE: EP) should give the affiliated MLP Kinder Morgan Energy Partners (NYSE: KMP) a huge network of pipeline assets, dwarfing smaller networks like Buckeye's.

Earlier this year, Buckeye made a big acquisition of its own, buying a marine terminal in New York Harbor from Chevron (NYSE: CVX) for $260 million. The move let Chevron sell a non-core asset while allowing Buckeye easier access to ship its oil and liquids. But arguably, it also started to raise Buckeye's profile as well -- potentially making it more attractive for acquirers looking for a takeover target.

Buckeye pays a hefty dividend, but with fairly high debt levels, it's unclear whether Buckeye can grow its way into a more promising future on its own. Continuing growth in the industry could help Buckeye, but a buyout from a bigger player seeking to consolidate might come at exactly the right time for shareholders looking for an easy exit.

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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