Is Ultra Petroleum the Perfect Stock?
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 Ultra Petroleum (NYS: UPL) 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 Ultra Petroleum.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||13.2%||Fail|
|1-Year Revenue Growth > 12%||16.8%||Pass|
|Margins||Gross Margin > 35%||74.6%||Pass|
|Net Margin > 15%||36.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||130.2%||Fail|
|Current Ratio > 1.3||0.43||Fail|
|Opportunities||Return on Equity > 15%||33.3%||Pass|
|Valuation||Normalized P/E < 20||12.59||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Ultra Petroleum finishes with a middle-of-the-road score of five. But despite the challenges the natural gas producer faces, it also has a huge competitive advantage over its peers that should help it only get stronger in the years ahead.
Despite its oil-centered name, Ultra Petroleum has a huge presence in both the oil and natural gas industry. Its primary properties are in the Green River Basin of Wyoming as well as the Marcellus Shale area of north-central Pennsylvania.
What makes Ultra special is its ultra-low production costs. With half the expenses of industry leaders like Chesapeake Energy (NYS: CHK) and Range Resources (NYS: RRC) and significant savings even over fellow low-cost producer Southwestern Energy (NYS: SWN) , Ultra has managed to stay not only profitable but wildly profitable, even with natural gas prices at stubbornly low levels.
However, that hasn't kept the shares from falling along with the recent drop in oil prices. Ironically, though, because Ultra has retained about 90% exposure to natural gas, crude prices shouldn't have that big an impact on its earnings.
The big question for Ultra is whether some catalyst will ignite natural gas prices higher. Whether it's demand-creating innovations from Clean Energy Fuels (NAS: CLNE) or Westport Innovations (NAS: WPRT) or simply big industry substituting cheap gas for more expensive fuels, Ultra will benefit whenever the push toward natural gas becomes a reality.
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 this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Westport Innovations, Ultra Petroleum, and Range Resources, as well as writing puts in Southwestern 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.