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 Permian Basin Royalty Trust (NYS: PBT) 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 Permian Basin Royalty Trust.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With a score of 5, Permian Basin Royalty Trust makes it halfway to a gusher. For 30 years, the entity has held royalty interests in Texas oil fields and still has hundreds of oil and gas wells operating.
Although they're obviously tied to energy, investing in royalty trusts is different from investing in ordinary oil companies. Royalty trusts are tied to the production in particular areas, with BP Prudhoe Bay (NYS: BPT) focusing on the North Slope of Alaska, San Juan Basin Royalty Trust (NYS: SJT) concentrated in northwestern New Mexico, and Hugoton Royalty Trust (NYS: HGT) largely targeting the Hugoton area of Texas, Oklahoma, and Kansas. As a result, even if energy prices skyrocket, royalty trusts won't necessarily follow suit unless the production from the particular properties the trusts own continues to stay stable or grow.
Despite its long history as an oil-producing region, the Permian Basin continues to draw interest. Late last year, Vanguard Natural Resources (NYS: VNR) bought a 46% interest in Encore Energy Partners (NYS: ENP) from Denbury Resources (NYS: DNR) in order to expand its holdings into the Permian Basin, among other regions.
Permian Basin Royalty Trust is one of the few stocks paying dividends monthly. But because royalty income varies from month to month, so too do dividend payments for shareholders. Over time, though, the trust has produced strong income for long-term investors.
Since it's a royalty trust, it's hard to judge Permian Basin Royalty Trust's perfection based on these metrics. As an investment with a great dividend yield, the royalty trust will suit investors well as long as energy prices continue to stay high and as long as new technology can continue to coax production from these wells.
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 the best investments from the rest.
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At the time thisarticle was published
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