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 TransCanada (NYS: TRP) 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 TransCanada.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.2%||Fail|
|1-Year Revenue Growth > 12%||10.5%||Fail|
|Margins||Gross Margin > 35%||52.3%||Pass|
|Net Margin > 15%||16.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||116.1%||Fail|
|Current Ratio > 1.3||0.53||Fail|
|Opportunities||Return on Equity > 15%||8.8%||Fail|
|Valuation||Normalized P/E < 20||19.92||Pass|
|Dividends||Current Yield > 2%||4.1%||Pass|
|5-Year Dividend Growth > 10%||5.6%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of 4, TransCanada isn't the most energetic of stocks. The pipeline company is in the perfect position to capitalize on a budding trend, but it's also run into some controversy.
TransCanada has gained notoriety lately for its role in trying to expand its Keystone pipeline system to extend from the oil-rich Canadian province of Alberta to the Gulf of Mexico. With players from Suncor Energy (NYS: SU) and Imperial Oil to oil giants ExxonMobil (NYS: XOM) , Chevron, and ConocoPhillips (NYS: COP) already active participants in Alberta's Athabasca oil sands region, the demand for that pipeline is clearly there.
But earlier this week, the company got bad news: The U.S. State Department has decided to postpone deciding whether to approve the project until 2013. The decision may stem from political controversy over possible environmental impacts on the land the pipeline would cross as well as the fact that the pipeline would make it easier to export oil and refined products beyond North America. Refiner Valero (NYS: VLO) took some heat over its support of the pipeline.
Keystone isn't TransCanada's only pipeline. But its Mainline pipeline, which runs from Alberta to eastern Canada, has seen a huge drop in natural gas volume -- due in part to increased use of natural gas in the oil-sands production process. Moreover, if plans from Apache, Encana (NYS: ECA) , and EOG Resources (NYS: EOG) to build a liquefied natural gas export terminal in Vancouver go through, that would reduce gas heading east through the Mainline even further.
For TransCanada to improve its situation, it would benefit from higher overall natural gas prices. Apart from that, it will have to sit through the bureaucratic processes of national governments before it can see whether Keystone proves to be a game-changer for the company.
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 the best investments from the rest.
Click here to add TransCanada to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."
At the time this article was published
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.