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 Pengrowth Energy (NYS: PGH) 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 Pengrowth Energy.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
When we looked at Pengrowth Energy last year, it scored six points. The company has survived a difficult time, but it hasn't been left unscathed by the experience.
Like peers Penn West Petroleum (NYS: PWE) and Enerplus (NYS: ERF) , Pengrowth was among the group of former Canadian royalty trusts that had to give up their favorable tax status. After converting to a corporation, combined with the drop in natural gas prices since the boom years of 2006 to 2008, Pengrowth has seen a big reduction in its monthly dividend. Still, the company managed to avoid the fate of Precision Drilling (NYS: PDS) , which eliminated its dividend entirely in 2009. By contrast, Pengrowth still has a healthy yield of more than 8%.
Moreover, this past summer, Pengrowth showed some resilience, as it managed to post net income for the second quarter that was five times higher than during the year-ago period. The company managed that strong result despite flooding, pipeline problems, and wildfires in the company's home turf in western Canada. Lately, though, the company's shares have fallen back to set new lows for the year on concerns about weakness in global energy demand. Just as other gas-focused stocks like EOG Resources (NYS: EOG) and Ultra Petroleum (NYS: UPL) have seen their prices plunge, so too do Pengrowth shares seem stuck in a deep well.
Pengrowth needs the recent weakness in energy prices to reverse itself. If gas prices rise, then Pengrowth should follow suit -- and eventually get a little closer to perfection.
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 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 Ultra Petroleum and Precision Drilling. 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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