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 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.
  • Moneymaking 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 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 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.

Petrobras in particular suffers from the fact that many of its most promising resources are in hard-to-reach areas offshore. As a result, it needs very high oil prices to justify the costs involved, and with massive debt approaching the $100 billion mark, the company has to be aware of financing costs that have sapped its bottom-line strength lately.

As a result, Petrobras has taken some drastic measures. Earlier this month, it announced that it would cut its dividend by more than half. The move will preserve cash to continue its ambitious investment plans, but it also shows the vulnerability of the company to current market conditions.

Problems at Petrobras could have a ripple effect across the industry. General Electric has counted on its budding relationship with the oil giant to advance its own oil business, and deepwater drilling companies Seadrill and Transocean have both provided rigs for Petrobras projects. All of those companies are in danger of taking a hit if Petrobras can't recover quickly.

For Petrobras to improve, it needs to do a better job developing its huge wealth of offshore resources. Combined with efforts to bring the Brazilian economy back to strength, Petrobras has plenty of potential to get back toward 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.

If you're an energy investor looking for exciting opportunities, then you should look more closely at Seadrill. To learn more about the strengths and weaknesses of this company, as well as what to expect from Seadrill going forward, be sure to check out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.

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

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

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Petrobras and Seadrill and owns shares of General Electric, Seadrill, and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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