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 HollyFrontier Corp (NYSE:HFC) 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 HollyFrontier Corp (NYSE:HFC).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 33.2% | Pass |
| 1-year revenue growth > 12% | 30.1% | Pass | |
| Margins | Gross margin > 35% | 16.2% | Fail |
| Net margin > 15% | 8.6% | Fail | |
| Balance sheet | Debt to equity < 50% | 21.2% | Pass |
| Current ratio > 1.3 | 2.23 | Pass | |
| Opportunities | Return on equity > 15% | 28.9% | Pass |
| Valuation | Normalized P/E < 20 | 6.87 | Pass |
| Dividends | Current yield > 2% | 2.1% | Pass |
| 5-year dividend growth > 10% | 68.2% | Pass | |
| Total score | 8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at HollyFrontier last year, the company has gained another point after climbing three points from 2011 to 2012, as the stock’s dividend yield soared. Yet the share price has jumped even further, rising about 70% over the past year.
In its refining operations, HollyFrontier Corp (NYSE:HFC) has continued to benefit from the big price differential between West Texas Intermediate and Brent crude. The situation has created a dividing line between winners and losers in the refining space, with HollyFrontier, Valero Energy Corporation (NYSE:VLO) , and Tesoro Corporation (NYSE:TSO) having their refineries close to cheap sources of oil and gaining a huge potential margin advantage over less well-placed rivals that have to import more expensive foreign oil for refining feedstock. Phillips 66 (NYSE: PSX) took extreme measures to ensure access to cheaper U.S. oil, signing a five-year deal to ship Bakken crude from North Dakota to the refiner’s New Jersey refinery.
At the same time, world demand for gasoline and other refined products has soared. Although U.S. use has been hampered by relatively high prices, exports of refined energy products have climbed substantially and are seen rising further, especially in the energy-hungry Latin American market.
In its most recent earnings report, HollyFrontier had impressive numbers, with net income up 75% year over year and refining margins up 52%. Yet the shares fell when utilization rates came in below expectations for the quarter. With the utilization issue likely being short-term in nature, though, the dip proved short-lived, and shares now trade at new highs once again.
For HollyFrontier to improve, it needs to keep pressing for growth and take maximum advantage of favorable cost conditions while they last. Eventually, spreads will narrow and the cycle will turn downward, but for now, HollyFrontier Corp (NYSE:HFC) is as closer to perfection as you could ask for a company in a low-margin business.
The article Has HollyFrontier Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned.
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