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 BHP Billiton (ASX: BHP) 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 BHP Billiton.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 13.7% | Fail |
| 1-Year Revenue Growth > 12% | 20.5% | Pass | |
| Margins | Gross Margin > 35% | 78.5% | Pass |
| Net Margin > 15% | 30.6% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 38.8% | Pass |
| Current Ratio > 1.3 | 0.85 | Fail | |
| Opportunities | Return on Equity > 15% | 38.3% | Pass |
| Valuation | Normalized P/E < 20 | 9.85 | Pass |
| Dividends | Current Yield > 2% | 3.0% | Pass |
| 5-Year Dividend Growth > 10% | 23.4% | Pass | |
| Total Score | 8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
The Big Australian mining company has continued to see fast growth, and a recent dividend boost combined with a significant share price drop has made the stock a lot more attractive.
BHP Billiton has long been known for its iron ore reserves, which made it a prime supplier for countries like China that needed the raw material to make steel. Along with peers Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) , BHP still has a stranglehold on the world's iron ore supply, but China's slowdown has reduced steel demand. That partially explains why Rio Tinto's growth has slowed in the past year, although Vale and BHP are both still seeing solid revenue gains.
Unlike Rio and Fortescue though, BHP Billiton has become a huge player in energy as well. With a timely purchase of a stake in the Fayetteville Shale from Chesapeake Energy (NYSE: CHK), BHP is gaining shale-gas expertise that it can potentially use around the world, especially in areas where gas prices present a more lucrative opportunity.
One issue BHP faces is its debt. Although a 39% debt-to-equity ratio isn't too bad, BHP's net debt amounts to more than $20 billion.
Still, BHP Billiton is close to perfection because overall demand for natural resources remains strong. If the economic recovery begins to accelerate, then it could help get BHP over the hump to claim those last two points on our 10-point scale.
Keep searching
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.
BHP Billiton may be close to perfection, but we've got some ideas you may like better. Let me invite you to learn about The Motley Fool's Top Stock For 2012 in a special free report. It's yours for the taking and is absolutely free, but don't miss out — click here and read it today.
More Reading:
