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 and then decide whether Chevron (CVX 0.23%) 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.
- Moneymaking 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 Chevron.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-year annual revenue growth > 15% |
1.8% |
Fail |
|
1-year revenue growth > 12% |
(5.8%) |
Fail | |
|
Margins |
Gross margin > 35% |
28.1% |
Fail |
|
Net margin > 15% |
11.8% |
Fail | |
|
Balance sheet |
Debt to equity < 50% |
9.2% |
Pass |
|
Current ratio > 1.3 |
1.64 |
Pass | |
|
Opportunities |
Return on equity > 15% |
20.5% |
Pass |
|
Valuation |
Normalized P/E < 20 |
7.89 |
Pass |
|
Dividends |
Current yield > 2% |
3.1% |
Pass |
|
5-year dividend growth > 10% |
9.2% |
Fail | |
|
Total score |
5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Chevron last year, the company has lost a point for the second year in a row, as its revenue fell in 2012 compared with previous years. The stock has done reasonably well, though, rising 10% over the past year and recently hitting new highs.
The pressure on revenue that Chevron has seen lately has come from a combination of production pressures and weak energy prices that have plagued the entire industry. In its most recent quarter, for instance, ExxonMobil (XOM 0.48%) reported declining production, even as Chevron managed to post a modest production increase. What saved both companies, though, was strength in their refining segments, with prices on gasoline, heating oil, and other distillates at extremely high levels compared with crude, especially inexpensive West Texas Intermediate.
But Chevron has been setting up a number of partnerships to exploit new production opportunities around the world. Last month, it signed a deal with China's CNOOC (CEO +0.00%) to explore the Pearl River Mouth Basin in the South China Sea, and just last week, Chevron confirmed that it will continue developing a field off the coast of Angola alongside partners that include Sonangol, Total (TOT +0.00%), and Eni. Along with many other ventures, Chevron has the potential to see dramatic gains in oil and gas production from these plays.
One interesting speculation for future growth is the possibility that Chevron might buy out Chesapeake Energy (CHK +0.00%). With Chesapeake CEO Aubrey McClendon leaving the company, some believe that the stage is set for a buyout, and with a solid balance sheet, Chevron has the resources to pick up Chesapeake's huge range of natural gas assets.
For Chevron to improve, it needs to get revenue moving back in the right direction. Once that happens, a faster-growing dividend for the Dividend Aristocrat shouldn't be too hard to accomplish, helping Chevron move even closer to perfection.
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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