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 Occidental Petroleum (NYS: OXY) 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 Occidental Petroleum.
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%
8 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Occidental Petroleum last year, the company has gained a point after staying stable between 2010 and 2011. Slowing revenue growth held the oil company's score back, but gains in current ratio and dividend yield pushed it closer to perfection, even though the stock dropped about 5% over the past year.
Occidental Petroleum isn't the first name many people think of in the energy industry, but it's a major player among big oil companies. Occidental has significant operations in the Permian Basin, where it's the largest oil producer among its peers and has had substantial success using enhanced oil recovery techniques to find new life out of oilfields that were once considered played-out. Occidental leads the industry in tertiary oil recovery, beating out even specialist Denbury Resources (NYS: DNR) for the top spot.
But in its home state of California, Occidental faces controversy. A recent lawsuit by Sierra Club, Earthjustice, and other groups against the state's oil and gas agency alleges that the agency has violated the California Environmental Quality Act. Phillips 66 (NYS: PSX) , Valero (NYS: VLO) , and BP (NYS: BP) are all part of a group of companies that along with Occidental made up 80% of California's drilling and used hydraulic fracturing on more than 600 wells collectively last year.
Just yesterday, Occidental announced earnings results for the third quarter. Revenue and net income fell due to lower oil prices, but production rose 3.7% overall and 8% domestically. Moreover, the company had great success from its midstream segment, with earnings more than doubling thanks to higher spreads for refined products.
For Occidental to improve, it needs to focus on finding new growth opportunities. That's the last hurdle Occidental needs to overcome in order to become a perfect stock.
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 Occidental Petroleum Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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