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 Buckeye Partners (NYS: BPL) 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 Buckeye Partners.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Buckeye Partners last year, the company has lost a point. The master limited partnership has continued to see huge revenue growth, but earnings haven't kept up, and the shares haven't performed well over the past year.
Buckeye is a master limited partnership that focuses on midstream operations, with pipeline and storage facilities throughout the U.S. for refined petroleum products. Pipeline companies have been a particularly hot area this year, as Kinder Morgan's big buyout of El Paso (NYS: EP) should give the affiliated MLP Kinder Morgan Energy Partners (NYS: KMP) a huge network of pipeline assets, dwarfing smaller networks like Buckeye's.
Earlier this year, Buckeye made a big acquisition of its own, buying a marine terminal in New York Harbor from Chevron (NYS: CVX) for $260 million. The move let Chevron sell a non-core asset while allowing Buckeye easier access to ship its oil and liquids. But arguably, it also started to raise Buckeye's profile as well -- potentially making it more attractive for acquirers looking for a takeover target.
Buckeye pays a hefty dividend, but with fairly high debt levels, it's unclear whether Buckeye can grow its way into a more promising future on its own. Continuing growth in the industry could help Buckeye, but a buyout from a bigger player seeking to consolidate might come at exactly the right time for shareholders looking for an easy exit.
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 in this article. 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.
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