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 Brookfield Infrastructure Partners (BIP +0.44%) 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 Brookfield Infrastructure Partners.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-year annual revenue growth > 15% |
341.1% |
Pass |
|
1-year revenue growth > 12% |
22.5% |
Pass | |
|
Margins |
Gross margin > 35% |
45.4% |
Pass |
|
Net margin > 15% |
5.3% |
Fail | |
|
Balance sheet |
Debt to equity < 50% |
101.9% |
Fail |
|
Current ratio > 1.3 |
0.59 |
Fail | |
|
Opportunities |
Return on equity > 15% |
4.2% |
Fail |
|
Valuation |
Normalized P/E < 20 |
294.44 |
Fail |
|
Dividends |
Current yield > 2% |
4.4% |
Pass |
|
5-year dividend growth > 10% |
10.2% |
Pass | |
|
Total score |
5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Brookfield Infrastructure Partners last year, the company has regained one of the two points it lost from 2011 to 2012. The shares have done well recently, rising more than 30% over the past year.
As its name implies, Brookfield owns a vast array of assets related to infrastructure of all types. Despite getting classified as a utility because of its electrical transmission lines, Brookfield's exposure runs across the gamut of infrastructure plays, including railroads, shipping ports, toll roads, and coal terminals.
But one huge opportunity that Brookfield has highlighted recently involves natural gas, with both pipelines and storage facilities attracting the company's attention. With its holdings in the Natural Gas Pipeline Company of America, which also involves Kinder Morgan (KMI +0.27%) as a 20% investor, Brookfield has a huge position in the U.S. storage market. Although up-and-coming midstream MLP Energy Transfer Partners (ETP +0.00%) has almost 75 billion cubic feet of storage and is growing fast, Brookfield's 300 billion cubic feet represents about 7% of the total U.S. capacity.
Timberland has also been a growth area for Brookfield. With the housing market having rebounded, industry giant Weyerhaeuser (WY +0.93%) is getting a big boost from the rising demand for wood. Like Weyerhaeuser, Brookfield has its timber assets located strategically in areas near the coast, making them more readily available for export.
For Brookfield to improve, it needs to work to turn more of its revenue into profits. Although the company's unusual structure makes P/E multiples somewhat misleading, Brookfield nevertheless has to find a way to get earnings to catch up with its stock price if it wants to get 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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