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 Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) 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:
1). 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.
2). Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
3). 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.
4). Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
5). 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.
6). 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 Petrobras.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 10.5% | Fail |
| 1-year revenue growth > 12% | 15.2% | Pass | |
| Margins | Gross margin > 35% | 24.7% | Fail |
| Net margin > 15% | 7.5% | Fail | |
| Balance sheet | Debt to equity < 50% | 56.8% | Fail |
| Current ratio > 1.3 | 1.70 | Pass | |
| Opportunities | Return on equity > 15% | 6.2% | Fail |
| Valuation | Normalized P/E < 20 | 9.69 | Pass |
| Dividends | Current yield > 2% | 2.9%* | Pass |
| 5-year dividend growth > 10% | 5.1% | Fail | |
| Total score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
*Based on trailing 12-month payouts; see below.
Since we looked at Petrobras last year, the company has plunged 3 points, with weaker margins and balance sheet hurting its score. The stock has also suffered since we last looked at the stock, losing nearly half its value over the past year.
Brazil has been a tough place for oil companies lately. Rig counts are down, as the regulatory environment has been extremely harsh. Foreign producer Chevron Corporation (NYSE:CVX) got sued by the government for billions of dollars in damages after a minor oil spill, and the threat of similarly sensationalized regulatory crackdowns has led to reduced willingness among energy companies to take the risk of doing business there.
