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 Continental Resources (NYS: CLR) 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 Continental Resources.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
4 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only four points, Continental Resources hasn't yet drilled up perfection for investors. However, the company has made some significant discoveries and expects to see much more growth in the years to come.
Continental is a major player in the Bakken shale formation in North Dakota. As the largest producer in the region, the company has set a goal to quadruple its production in the next five years. That may be ambitious, but it's also necessary to make sure it keeps up with competitors in the region, which include Kodiak Oil & Gas (ASE: KOG) , Brigham Exploration (NAS: BEXP) , and Marathon Oil (NYS: MRO) .
But Continental's prospects go well beyond the Northern Plains. Fellow Fool David Lee Smith points out that Continental might get tapped to help China develop its own shale reserves, perhaps joining Chesapeake Energy (NYS: CHK) and CNOOC (NYS: CEO) in working to reduce the emerging market's reliance on foreign resources.
Investors in Continental need to be aware of the potential for hedging-related losses in some quarters. Swings in derivative positions related to price changes in oil and gas can produce big hits to earnings that aren't directly related to production. As long as production growth continues, you should see hedges as protecting the company from any further drops in energy prices.
Continental shares are expensive and pay no dividend, which bring it three black marks on our scorecard. But if the Bakken proves to be everything the company thinks it will, then Continental could become a perfect stock in short order.
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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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave 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 adisclosure policy.
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