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 TransAtlantic Petroleum (NYSEMKT: TAT ) 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 TransAtlantic Petroleum.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | 186.1% | Pass |
| � | 1-year revenue growth > 12% | 14.0% | Pass |
Margins | Gross margin > 35% | 86.3% | Pass |
| � | Net margin > 15% | (28.5%) | Fail |
Balance sheet | Debt to equity < 50% | 14.9% | Pass |
| � | Current ratio > 1.3 | 1.06 | Fail |
Opportunities | Return on equity > 15% | (20.9%) | Fail |
Valuation | Normalized P/E < 20 | NM | NM |
Dividends | Current yield > 2% | 0.0% | Fail |
| � | 5-year dividend growth > 10% | 0.0% | Fail |
| � | � | � | � |
| � | Total score | � | 4 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at TransAtlantic Petroleum last year, the company has kept its four-point score. Yet the company has remained unprofitable, and with slowing revenue growth, the stock has fallen more than 20% over the past year.
TransAtlantic is hardly unique as an oil and gas producer, but it has a somewhat unusual geographical focus among energy companies. TransAtlantic focuses on Eastern Europe, holding properties in Turkey, Bulgaria, and Romania. The company has been seeking to ramp up its operations, having given guidance back at the beginning of 2013 that it expects to spend more than $100 million on exploratory drilling in order to boost its production.
The company's location gives it big advantages over U.S. producers. TransAtlantic took in almost $10 per Mcf of natural gas during the fourth quarter of 2012, showing the big disparity in gas prices compared to what U.S. producers are getting. By contrast, Chesapeake Energy (NYSE: CHK ) made its most recent assumptions about its current outlook back in February based on projections of $3.50-$4.00 per Mcf for 2013. SandRidge (NYSE: SD ) had realized reported natural gas prices of just $3.09 per Mcf in its most recent quarter.
Even with those advantages, TransAtlantic hasn't delivered the growth that many investors wanted to see. Proved-developed and total-proved reserves have actually fallen from their levels at the end of 2011, and although oil production climbed 14% from the year-ago quarter, natural-gas production dropped 45%.
For TransAtlantic to improve, it needs to focus on more profitable development activity. Until it can get its bottom line into the black, TransAtlantic will struggle in its efforts to become a perfect stock.
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.
Due in part to weak gas prices, Chesapeake Energy trades at a deep discount. Yet energy prices aren't the only concern for investors, as Chesapeake's share price fell after negative news surfaced concerning the company's management and spiraling debt picture. While the debt issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy.
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