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 QEP Resources (NYS: QEP) 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 QEP 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%
2 out of 9
Source: S&P Capital IQ. NM = not meaningful; QEP started paying a dividend in Aug. 2010. Total score = number of passes.
With only two points, QEP Resources isn't showing much energy. But the oil and gas company sees things picking up this year as it adapts to changing conditions in the energy markets.
As an independent producer, QEP has properties across the U.S., ranging from the Haynesville area of Louisiana to North Dakota's Bakken region and various areas along the Rocky Mountains. In addition to producing oil and gas, the Denver-based company also processes, stores, and markets natural gas.
But gas producers in particular have had a tough time lately. Rock-bottom prices have prompted many players to make strategic shifts. Chesapeake Energy (NYS: CHK) said last month that it would cut its dry gas rig count in half, cut capital expenditures on gas projects, and shut in some natural gas production. Devon Energy (NYS: DVN) is putting 90% of its new capital spending toward oil and liquids projects rather than natural gas. Even small producer Carrizo Oil & Gas (NAS: CRZO) has moved a lot more of its capital budget toward liquids in the Eagle Ford and Niobrara areas.
Yet just last week, QEP announced better-than-expected earnings results. Even more importantly, though, the company said that it would join the trend and move predominantly toward oil production this year, cutting back on capital spending for gas projects. Although QEP cut its 2012 earnings guidance, the move seems justified based on the slump in natural gas.
For QEP to improve, it simply needs the energy markets to cooperate. If oil stays high and gas rebounds, then the sky's the limit for QEP and many of its small peers. If the glut of gas continues, though, QEP will need its oil and liquids plays to pay off.
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 Devon Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Devon 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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