Has ConocoPhillips Become 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 ConocoPhillips (NYS: COP) 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 ConocoPhillips.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-year annual revenue growth > 15%5.1%Fail
1-year revenue growth > 12%32.8%Pass
MarginsGross margin > 35%22.8%Fail
Net margin > 15%4.9%Fail
Balance sheetDebt to equity < 50%41.7%Pass
Current ratio > 1.31.12Fail
OpportunitiesReturn on equity > 15%16.4%Pass
ValuationNormalized P/E < 207.50Pass
DividendsCurrent yield > 2%3.9%Pass
5-year dividend growth > 10%12.7%Pass
Total score6 out of 10

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

Since we looked at ConocoPhillips last year, the oil giant has lost a point. A weaker current ratio is to blame for the drop. But longer term, Conoco appears poised for a decisive change in its business.

Until recently, becoming as big as possible seemed to be the way energy companies evolved. With behemoths ExxonMobil (NYS: XOM) and Chevron (NYS: CVX) each making sizable purchases of natural gas companies in the past couple of years, that trend appeared to have no signs of stopping.

But earlier this year, Marathon Oil (NYS: MRO) spun off its refinery unit into a new entity called Marathon Petroleum (NYS: MPC) . Given how Marathon's shares traded around the announcement, Conoco decided to follow suit and expects to split its refining operations from its pure exploration and production business within the next six months or so.

Oddly enough, though, Conoco's actual oil production is down year over year during the first nine months of 2011. In fact, among Big Oil stocks, only BP (NYS: BP) saw a bigger production decline. That could bode ill for the company's future prospects -- although tighter supplies would at least have the beneficial effect of supporting high oil prices.

Going forward, Conoco needs to sustain its strong dividend growth while boosting its margins, which lag many of its peers. If it can do so, Conoco could get a lot closer to perfection in the near future.

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 ConocoPhillips 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. Motley Fool newsletter services have recommended buying shares of Chevron. 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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