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 Energy Transfer Equity (NYS: ETE) 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 Energy Transfer Equity.
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.
With only three points, Energy Transfer Equity has some improving to do. The master limited partnership has an excellent dividend yield, but its units have been under pressure after the recent decline in oil prices.
Energy Transfer Equity is part of a somewhat complicated corporate structure involving several other partnerships. It owns the general partnership interests of both Energy Transfer Partners (NYS: ETP) and Regency Energy Partners (NYS: RGP) , as well as limited partnership interests that give it a roughly 23% stake in Energy Transfer Partners and a 15% stake in Regency.
But in more basic terms, the company profits from underlying businesses that transport and distribute natural gas to a variety of customers, including utilities, power plants, and industrial users. Given its status as an MLP itself, Energy Transfer Equity benefits from favorable tax rules and delivers a nice yield to its unitholders.
Energy Transfer Equity has been busy making strategic moves over the past year. The company won a bidding war against Williams (NYS: WMB) to buy Southern Union and its southeast U.S. pipelines last summer, expanding its distribution network. Combined with Energy Transfer Partners' sale of its propane business to AmeriGas Partners (NYS: APU) , the group is now squarely focused on natural gas distribution, although the AmeriGas units it accepted as compensation continue to give it some propane exposure.
What Energy Transfer Equity needs to have the best chance of success is for natural gas to become a much more commonly used fuel. When that happens, the infrastructure that the company has in place will become much more valuable -- and unitholders could see growth that would justify the current valuation.
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. 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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