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 Halliburton Company (NYSE:HAL) 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 Halliburton.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 13.3% | Fail |
| 1-year revenue growth > 12% | 14.8% | Pass | |
| Margins | Gross margin > 35% | 16.6% | Fail |
| Net margin > 15% | 9.2% | Fail | |
| Balance sheet | Debt to equity < 50% | 30.5% | Pass |
| Current ratio > 1.3 | 2.75 | Pass | |
| Opportunities | Return on equity > 15% | 17.8% | Pass |
| Valuation | Normalized P/E < 20 | 14.27 | Pass |
| Dividends | Current yield > 2% | 1.3% | Fail |
| 5-year dividend growth > 10% | 0.6% | Fail | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Halliburton last year, the company has held onto the point it gained from 2011 to 2012. The stock has performed even better, climbing 20% over the past year.
Halliburton Company (NYSE:HAL) is best known for its strong presence in the domestic oil-services industry. Larger rival Schlumberger Limited. (NYSE:SLB) dominates the global market with a worldwide presence just about everywhere energy products are sought. By contrast, although Halliburton operates in 80 countries, it gets more than half of its revenue from U.S. mainland operations, and its expertise in hydraulic fracturing has given it a huge advantage in tapping the fast-growing market in shale plays across the nation.
That expertise has already started to translate into global growth as well, as foreign producers seek out experienced fracking experts for guidance. Both Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI) have partnered with Chinese companies to expand production there, with Baker Hughes investing to develop China-specific technology tailored to its unique geology.
In its most recent earnings report, Halliburton noted that its overseas operations posted much better results than what it saw in its U.S. operations, with Saudi Arabia, Australia, and Russia being particularly strong. Moreover, it also touted a partnership with Caterpillar Inc. (NYSE:CAT) and Apache Corporation (NYSE:APA) to develop pumping equipment that can run on both diesel and natural gas, essentially taking the plentiful gas obtained from its drilling operations and using a portion of it to fuel further production.
For Halliburton to improve, it needs drilling activity to recover in North America in the near future. Only once it can turn its domestic focus to its advantage will Halliburton Company (NYSE:HAL) stand a chance of moving toward perfection.
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.
The article Has Halliburton Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Halliburton and owns shares of Apache.
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