Has Spectra Energy Become the Perfect Stock?
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 Spectra Energy (NYS: SE) 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 Spectra Energy.
What We Want to See
Pass or Fail?
Five-year annual revenue growth > 15%
One-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%
Five-year dividend growth > 10%
4 out of 10
Spectra Energy is a natural-gas pipeline company. That's been the right place to be in the space lately, as the company actually benefits from lower natural-gas prices so long as gas keeps flowing through pipelines. With substantial assets in both long-haul and end-source transmission lines, Spectra serves both producers at the source and consumers who actually use gas.
But Spectra doesn't just specialize in moving dry gas. It has also been part of the shift to natural-gas liquids with its joint ownership of DCP Midstream with ConocoPhillips (NYS: COP) . As the largest producer of liquids in the lower 48, it's seeking to add new services to its gathering and processing of NGLs.
Spectra also has a number of growth opportunities. It's hoping to be part of several proposed projects to export liquefied natural gas, including Cheniere Energy's (ASE: LNG) Sabine Pass on the Texas-Louisiana border and Encana (NYS: ECA) and EOG Resources' (NYS: EOG) Kitimat location on the British Columbian coast.
For Spectra Energy to improve, it needs to ramp its earnings up far enough to justify its somewhat high valuation. If it can do so, then the next step is to improve its balance sheet and boost returns on equity. Given enough time, Spectra has the potential to get a whole lot closer to perfection in the years ahead.
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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The article Has Spectra Energy 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 Spectra Energy. Motley Fool newsletter services recommend Spectra Energy. 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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