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 and then decide whether Transocean 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.
Moneymaking 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 Transocean.
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%
2 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Transocean last year, the company has seen its score cut in half, extending its losing streak to two years. Falling gross margins and the suspension of its dividend are to blame for the score loss, yet the stock has actually posted a reasonably strong gain of 20% over the past year.
Transocean is best known for its role in the Deepwater Horizon incident that created the huge oil spill in the Gulf of Mexico three years ago. Just a few weeks ago, Transocean finally settled with the Department of Justice, pleading guilty to violations of the Clean Water Act and agreeing to pay $1.4 billion in civil and criminal penalties.
But even having put the Gulf tragedy behind it, Transocean has faced further legal complications. The Brazilian government has sought billions in damages from Transocean and Chevron in connection with a tiny 3,600-barrel oil spill in the Santos Basin off its coast. With the Santos offering huge potential for Chevron as well as numerous other producers, Transocean can't afford to alienate production-company customers by getting a bad reputation with international governments.
Still, Transocean is well positioned to profit from massive exploration activity around the world. As the Arctic starts to become the hot area in drilling, Transocean and Seadrill are moving quickly to boost their harsh-environment rig counts. Both are hoping to serve a number of producers making moves in the Arctic.
For Transocean to improve, all it needs to do is to take advantage of rising rig counts around the world. With Seadrill and Hercules Offshore both having seen huge share-price gains in light of increased demand, Transocean has lagged in its industry -- but now that the overhang of the Gulf oil spill is behind it, Transocean has a chance to move 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 Transocean Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron and Seadrill and owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.