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 Comstock Resources (NYS: CRK) 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 Comstock Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.9%)||Fail|
|1-Year Revenue Growth > 12%||6.6%||Fail|
|Margins||Gross Margin > 35%||80.4%||Pass|
|Net Margin > 15%||(3.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||70.2%||Fail|
|Current Ratio > 1.3||0.59||Fail|
|Opportunities||Return on Equity > 15%||(1.2%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With only one point, Comstock Resources hasn't drilled up success just yet. The oil and gas explorer has made some aggressive moves but still hasn't found the profitability that it needs.
Comstock is an energy exploration and production company that has an unfortunate concentration in natural gas. That's been the kiss of death in recent years, as companies like SandRidge Energy (NYS: SD) , Chesapeake Energy (NYS: CHK) , and EOG Resources (NYS: EOG) have largely moved away from the terrible price environment of gas toward a greater emphasis on oil and liquids.
Finally, though, Comstock has started to grab on to that trend as well. Earlier this week, the company announced that it had bought substantial acreage in the Delaware Basin area of Texas, which is rich in oil. In connection with the move, Comstock said that it plans to reduce its natural gas mix in favor of greater exposure to oil. With its shale drilling program in the Eagle Ford area, where it competes with companies including Anadarko Petroleum (NYS: APC) , Chesapeake, and Murphy Oil (NYS: MUR) , Comstock is trying to build a more diverse portfolio of properties.
Unfortunately, the purchase will add to the company's debt, and that led to S&P putting out a negative outlook on Comstock's current junk bond rating. At some point, Comstock will need to start working on improving its balance sheet, but for now, the path toward perfection requires a full-speed-ahead approach toward lucrative discoveries and revenue growth that will translate to a positive bottom line.
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 the best investments from the rest.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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