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 Precision Drilling (NYS: PDS) 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 Precision Drilling.
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%
4 out of 9
Source: S&P Capital IQ. NM = not meaningful; Precision Drilling eliminated its dividend in 2009. Total score = number of passes.
Since we looked at Precision Drilling last year, the company has picked up a point on its score. A huge jump in revenue this year accompanies a significant drop in its earnings multiple, although higher debt presents somewhat of a concern.
Precision is a contractor driller of oil and gas wells. Previously set up as a Canadian royalty trust, the company had to convert to corporate status in mid-2010 when the Canadian government abolished the entity's favorable tax status. That threatened most royalty trusts' high dividend yields, but unlike fellow Canadian royalty trusts Penn West Petroleum (NYS: PWE) , Pengrowth Energy (NYS: PGH) , and Enerplus (NYS: ERF) , Precision had to eliminate its dividend entirely.
But with most believing that cheap oil will never come back, Precision Drilling could continue to see a substantial recovery from its lean years during the financial crisis. Even with low natural gas prices and the recent drop in oil, companies with oil and gas reserves such as Kodiak Oil & Gas (NYS: KOG) and Brigham Exploration (Nasdsaq: BEXP) have an incentive to get oil and gas out while the getting's good, which has led to a surge in drilling activity for Precision.
Precision has a very real chance of recovering its former glory, but to do so, it needs to keep paying down debt and reestablish at least part of its past dividend. If it gets help from a strong energy sector, then Precision could be a perfect stock in the not-too-distant future.
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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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Precision Drilling. 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.
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