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 Gran Tierra Energy (ASE: GTE) 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 Gran Tierra Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

103.9%

Pass

 

1-Year Revenue Growth > 12%

21.1%

Pass

Margins

Gross Margin > 35%

83.0%

Pass

 

Net Margin > 15%

16.2%

Pass

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

2.34

Pass

Opportunities

Return on Equity > 15%

8.3%

Fail

Valuation

Normalized P/E < 20

9.51

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Gran Tierra Energy weighs in with a strong seven-point score. But the stock hasn't been a huge success, with shares down about 10% over the past year.

Gran Tierra is a Canada-headquartered oil and gas exploration company with extensive activity across the South American continent. The company has a number of producing wells and has plans to drill in Brazil, Colombia, Peru, and Argentina through a variety of joint ventures and solely owned properties. For instance, Gran Tierra has a joint venture involving both Statoil (NYS: STO) and Petrobras (NYS: PBR) to explore areas off the Brazilian coast.

Unfortunately, the company has gone through some tough times. Late last year, Gran Tierra came up empty on exploratory wells it drilled in Colombia. Both its Rumiyaco-1 and Brillante SE-2 wells failed to find oil or other commercially viable hydrocarbons.

One thing that Gran Tierra has going for it is that it carries no debt. Like fellow E&P companies Cobalt International Energy (NYS: CIE) and Contango Oil & Gas (ASE: MCF) , having a clean balance sheet gives Gran Tierra flexibility to pursue opportunities without worrying about whether they'll adversely affect near-term cash flow and debt maintenance.

For Gran Tierra to improve, it needs to get its returns on equity up. The easiest way for that to happen would be for it to make a promising energy discovery. That's easier said than done, obviously, but if Gran Tierra strikes it rich, it could be just a step or two away from perfection soon afterward.

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.

Gran Tierra Energy has plenty of potential, but we think you can do even better. We've picked one incredible natural gas company that presents a rare "double-play" investment opportunity today. We're calling it "The One Energy Stock You Must Own Before 2014," and you can uncover it today, totally free, in our premium research report. Click here to read more.

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

The article Is Gran Tierra Energy the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Petroleo Brasileiro and Statoil. 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.

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