Is Overseas Shipholding Group the Perfect Stock?

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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 Overseas Shipholding Group (NYS: OSG) 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 Overseas Shipholding Group.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%(0.9%)Fail
 1-Year Revenue Growth > 12%(3.1%)Fail
MarginsGross Margin > 35%10.8%Fail
 Net Margin > 15%(19.4%)Fail
Balance SheetDebt to Equity < 50%133.2%Fail
 Current Ratio > 1.32.44Pass
OpportunitiesReturn on Equity > 15%(11.5%)Fail
ValuationNormalized P/E < 20NMNM
DividendsCurrent Yield > 2%8.4%Pass
 5-Year Dividend Growth > 10%15.5%Pass
    
 Total Score 3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

With only three points, Overseas Shipholding Group looks like it's struggling to stay afloat. A glut of ships has hurt oil shippers in particular recently.

Several years ago, shipping companies enjoyed nearly unprecedented favorable conditions for their industry. With demand pushing shipping prices up, shipbuilders like Frontline (NYS: FRO) , Nordic American Tanker (NYS: NAT) , and Overseas Shipholding had huge incentives to add to their fleets, which eventually caused a glut of tankers. Although high oil prices helped delay the inevitable recalibration of supply and demand, the financial crisis eventually threw tanker stocks for a huge loop.

Now, that glut has led some shippers to take tankers straight from the shipyard to idle for months. Just as dry-bulk-focused companies like DryShips (NAS: DRYS) and Diana Shipping (NYS: DSX) have had to survive through a downturn in bulk shipping rates, so too may Overseas and its peers have to withstand a long storm in the tanker industry.

Overseas does have an ace in the hole, though: Along with Teekay LNG (NYS: TGP) and Golar LNG (NAS: GLNG) , it has several liquefied natural gas carriers. As transporting natural gas becomes more popular, the industry may give Overseas much needed revenue even if crude exports fall.

But it could be hard going for a while. Earlier this week, an article from Financial Times said that Frontline would almost certainly have to restructure, pushing Overseas and other shippers down along with it. Overseas' debt situation isn't quite as dire as Frontline's, but with spot shipping rates at extremely low levels, shippers are all going to struggle to meet their obligations.

If the industry turns, then Overseas should move closer to perfection as part of the cyclical nature of the business. In fact, a shakeout may well help Overseas by giving it a more competitive position -- as long as it makes it through the tough times.

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.

Click hereto add Overseas Shipholding Group to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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