Has Getty Realty Become the Perfect Stock?

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 Getty Realty 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 Getty Realty.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.2%

Fail

 

1-year revenue growth > 12%

(9.5%)

Fail

Margins

Gross margin > 35%

70.4%

Pass

 

Net margin > 15%

12.2%

Fail

Balance sheet

Debt to equity < 50%

46.2%

Pass

 

Current ratio > 1.3

0.88

Fail

Opportunities

Return on equity > 15%

3.7%

Fail

Valuation

Normalized P/E < 20

55.80

Fail

Dividends

Current yield > 2%

3.8%

Pass

 

5-year dividend growth > 10%

(27.3%)

Fail

       
 

Total score

 

3 out of 10

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

Since we looked at Getty Realty last year, the company has dropped a point, as its revenue declined. Yet the restoration of its dividend helped send its shares up 50% over the past year.

Getty Realty is structured as a real estate investment trust, owning the real estate underlying hundreds of gas stations that it then leases to Getty Petroleum Marketing and other gas-station operators. With the bankruptcy of Getty Petroleum in late 2011, which had been by far its largest source of revenue, Getty Realty found itself having to suspend its dividend.

But early last year, Getty Realty successfully petitioned the bankruptcy court to repossess the gas stations it had leased to Getty Petroleum. Since then, it has been able to enter new station-leasing deals with a number of downstream-marketing companies, with Lehigh Gas Partners taking on 145 properties and BP leasing 28 stations. A subsidiary of Global Partners also stepped up to take 84 stations in the New York City metropolitan area. Getty Realty has also sold outright many of the locations it had formerly leased to Getty Petroleum.

Now, Getty Realty is looking to expand. The REIT said earlier this month that it was interested in acquiring new retail-gasoline locations. With $100 million to spend on acquisitions, the company wants more money-making properties to continue its huge success.

For Getty Realty to improve, it merely needs to continue on its transformative course. Now no longer a captive company to Getty Petroleum, Getty Realty has built a diversified business that has much greater chances of becoming successful in the long run.

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.

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

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

Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. 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.

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