Investors would do well to follow some of the suggested guidelines when it comes to looking for new investment ideas. These are not absolute rules, they are just suggestions and there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible. It is important that readers take the time to read and understand the selection process involved in coming up with these picks which are partially listed below:
- Net income - It should be generally trending upwards for the past 3-4 years.
- Cash flow per share - It should be trending upwards for the past three years.
- Total cash flow from operating activities - It should be trending upwards for the past 3-4 years.
- Current ratio - Should be above 1.
Interest coverage ratio - When available, any value above 1.5 is OK, but we would aim for 2.5-3.00 as our starting range. The higher the number the better. The full list of suggestions can be accessed here. BP Plc (BP) is an example of play that meets and exceeds all the listed conditions.
Reasons to be bullish on Bp Plc :
- It is getting rid of its non-core upstream properties while at the same time creating a portfolio with potential for stronger growth from a smaller base. It is divesting the Carson, California, and Texas City, Texas, refineries; the sale is expected to go through by the first half of 2012.
- It has, however, kept three refineries with the greatest competitive advantage which should improve and boost returns.
- It plans to drill 12 exploration wells in 2012, which should help improve production. The cash margins per barrel on these projects are projected to be double the average of its existing portfolio. If this comes to pass, it should boast cash flow. Management has stated that half of any increase in cash flow would be spent on growth capex, and the balance would be spent in increasing share value via an increase in dividends and or share buybacks.
- Net income increased from $16.65 billion in 2009 to $25.7 billion in 2011
- Cash flow per share increased from $9.67 in 2009 to $10.94 in 2011
- Annual EPS before NRI increased from $5.01 in 2007 to $7.36 in 2011
- Sales rose from $24.6 billion in 2009 to $38.6 in 2011
- A good yield of 5.00%
- A low payout ratio of 29%
- A five year sales growth rate of 4.88%
- A low long term debt to equity ratio of 0.33
- A quarterly revenue growth rate of 10%
- A strong levered free cash flow of $11.04 billion
- A good retention ratio of 71% (it's calculated by subtracting 1 from the payout ratio). It is the proportion of net income that is not paid out as dividends. The higher the number the better as it means there is more money available to fund future growth.
- A good free cash flow yield of 6.5%
- $100K invested for 10 years would have grown to $144K; if the dividends were reinvested the rate of return would be much higher.
Suggested Strategy
If you are looking for a great entry consider waiting for it to test the 34-35 ranges and then sell puts at strikes you would not mind owning the stock at. If the stock trades below the strike price the shares might be assigned to your account. Your final price will be the strike price minus the premium you were paid. If the shares do not trade below the strike price, you get to walk away with the premium and can repeat the process all over again. Selling puts is like getting paid to wait for your order to get filled.
Company: Bp Plc
Growth
- Net Income ($mil) 12/2011 = 25700
- Net Income ($mil) 12/2010 = -3719
- Net Income ($mil) 12/2009 = 16578
- EBITDA ($mil) 12/2011 = 49969
- EBITDA ($mil) 12/2010 = 6339
- EBITDA ($mil) 12/2009 = 37230
- Cash Flow ($/share) 12/2011 = 10.94
- Cash Flow ($/share) 12/2010 = 10.5
- Cash Flow ($/share) 12/2009 = 9.67
- Sales ($mil) 12/2011 = 386463
- Sales ($mil) 12/2010 = 308928
- Sales ($mil) 12/2009 = 246138
- Annual EPS before NRI 12/2007 = 5.01
- Annual EPS before NRI 12/2008 = 7.08
- Annual EPS before NRI 12/2009 = 5.76
- Annual EPS before NRI 12/2010 = 9.17
- Annual EPS before NRI 12/2011 = 7.36
Dividend history
- Dividend Yield = 5.00
- Dividend Yield 5 Year Average 12/2011 = 4.21
- Dividend 5 year Growth 12/2011 = -11.55
Dividend sustainability
- Payout Ratio 09/2011 = 0.29
- Payout Ratio 5 Year Average 12/2011 = 0.38
Performance
- Next 3-5 Year Estimate EPS Growth rate = 4
- 5 Year History EPS Growth 12/2011 = 4.01
- ROE 5 Year Average 12/2011 = 21.1
- Current Ratio 12/2011 = 1.23
- Current Ratio 5 Year Average = 1.09
- Quick Ratio = 0.85
- Cash Ratio = 0.33
- Interest Coverage Quarterly = N/A
Conclusion
We still believe there is more downside to this market before a multi month bottom takes hold. Long-term investors can use strong pullbacks to slowly start deploying money into long-term investments. A great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors looking for even more investment ideas might find these articles to be of interest - General Electric: An Option Strategy That Could Potentially triple your yield and Duke Energy Among 4 Growth Plays To Contemplate.
Disclaimer
This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: EPS and Price vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Data for Ycharts was provided by Ycharts.com.
