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 McMoRan Exploration (NYS: MMR) 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 McMoRan Exploration.
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 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With a score of five, McMoRan Exploration finds itself in the middle of the pack. The oil and gas explorer has benefited from interest in energy lately, but it hasn't found the perfect path to huge profits just yet.
McMoRan is an exploration and production company that focuses on the Gulf of Mexico, with both offshore and onshore activity. Although it has some shared management with copper-producerFreeport-McMoRan Copper & Gold (NYS: FCX) , the two companies have been largely unrelated since the spinoff that created Freeport in 1994.
This week, shares of McMoRan have moved substantially higher. Although a rise in oil prices has created a broad-based rally for energy companies, Gulf-focused companies including W&T Offshore (NYS: WTI) and Callon Petroleum (NYS: CPE) saw particularly strong moves.
The problem, though, is that unlike most of its Gulf-region peers, including Gulfport Energy (NAS: GPOR) and Swift Energy (NYS: SFY) , McMoRan isn't profitable. Moreover, even on an EBITDA basis, its valuation is much higher than its competitors'.
For McMoRan to move closer to perfection, it needs initiatives like its deepwater explorations to bear fruit. If the company can cut its costs of production, it could become profitable even in a poor environment for gas prices -- a step that would move the company forward quickly.
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. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of W&T Offshore. 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.