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 Marathon Oil 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 Marathon Oil.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(23.2%)

Fail

 

1-year revenue growth > 12%

6.8%

Fail

Margins

Gross margin > 35%

65.2%

Pass

 

Net margin > 15%

10.1%

Fail

Balance sheet

Debt to equity < 50%

37.7%

Pass

 

Current ratio > 1.3

0.74

Fail

Opportunities

Return on equity > 15%

8.9%

Fail

Valuation

Normalized P/E < 20

6.34

Pass

Dividends

Current yield > 2%

2.1%

Pass

 

5-year dividend growth > 10%

3.4%*

Fail

       
 

Total score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes. * Reflects adjustment for spinoff.

Since we looked at Marathon Oil last year, the company gave back the two points it gained from 2011 to 2012. The stock has recovered from a slump early in 2012 and is essentially flat over the past year.

After having spun off its downstream operations into Marathon Petroleum more than a year ago, Marathon has operated all year as an exploration and production company. As such, it has built a course for much more aggressive growth than it sought as an integrated energy company. On top of its portfolio of dependable revenue-producing assets, Marathon seeks to strengthen its presence in the fast-growing Eagle Ford and Bakken regions, as well as exploring new areas such as eastern Africa, Norway, and Iraq.

But Marathon is already in an enviable position because it has focused its efforts on maximizing its already oil-rich production. Chesapeake Energy and EOG Resources have had to go through extensive paring of their assets in order to try to reduce their natural gas exposure and increase oil and liquids production, but with Marathon paying the bulk of its attention to already established oilfields, it managed to nearly double its liquids production between mid-2011 and the end of 2012. Yet even based on proven oil reserves, the company is valued very inexpensively.

In its most recent quarter, however, Marathon disappointed investors by missing earnings estimates. Despite higher revenue and better production, the company suffered from rising expenses for exploration activity, which soared 70% compared to the previous year. A huge provision for income taxes also weighed on results.

For Marathon to improve, it needs to keep revenue moving upward and focus on building up its returns on equity. If it can do that and keep its dividend payout rising, then Marathon could get a lot closer to perfection in the years ahead.

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.

As impressive as Marathon looks, energy investors would be hard-pressed to find another company trading at a deeper discount than Chesapeake Energy. To find out whether Chesapeake is the best buy in the energy industry, don't miss out on our premium report on the company, in which our top energy analyst looks at the company's prospects and potential roadblocks. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

Click here to add Marathon Oil to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Marathon Oil Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has options positions on Chesapeake 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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