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 Frontline (NYS: FRO) 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 Frontline.
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%
1 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Frontline last year, the company has lost another point, bringing its total drop since 2010 to three points as its gross margin fell below 35%. The already beaten-down shares have lost another 20% over the past year.
The bad news for the shipping industry just never seems to stop, as a glut in both tankers and drybulk ships have hurt companies in both segments of the industry, as DryShips (NAS: DRYS) has lost nearly two-thirds of its value in the past two years. For oil transportation, the problem comes from extremely low day-rates for very large crude carrier vessels, which have fallen 70% from their 2010 levels and more than 5% so far this year. With even more ships becoming available next year, rates could plunge even further.
Although fellow tanker companies Nordic American Tankers (NYS: NAT) , Teekay Tankers (NYS: TNK) , and Overseas Shipholding Group (NYS: OSG) all have debt on their books to at least some extent, Frontline has had serious liquidity issues. The company will need to come up with some innovative ways to keep its financing in place in order to remain operating.
Unfortunately, the result has been bad for income investors. Just last week, Frontline plunged as it said that it would not pay a dividend for the quarter. With much bigger losses than analysts had expected, things have never looked worse for Frontline.
For Frontline to improve, it really needs some improvement in conditions throughout the shipping market. With that unlikely to happen, Frontline will likely struggle to survive, let alone get any closer to perfection in the years ahead.
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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The article Has Frontline Become the Perfect Stock? originally appeared on Fool.com.
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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