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 Encana (NYS: ECA) 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 Encana.
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 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Encana last year, the company hasn't been able to recover any of the five points it lost from 2010 to 2011. The stock has managed to gain about 10% over the past year, but it's still a shell of where it was before it spun off its Cenovus oil sands unit near the end of 2009.
As a natural gas producer, Encana has been stuck in the doldrums for a long time. Even though natural gas prices have finally risen from their extreme lows earlier this year, they're still well below normal levels and have really hurt players throughout the industry. Moreover, Encana has had some unique challenges to overcome, as it fights findings from the EPA that the company drilled wells improperly, leading to alleged groundwater contamination.
But with signs of a turnaround, Encana has been able to make some promising deals. Earlier this month, steel producer Nucor (NYS: NUE) agreed to a supply contract that should provide Nucor with all the gas it needs for the next 13-22 years. The deal gives Encana some benefits from cost-sharing as well as guaranteeing a buyer for its gas production.
Longer-term, Encana has a lot riding on its liquefied natural gas export project in the Kitimat area of British Columbia, which it's working on with Apache (NYS: APA) and EOG Resources (NYS: EOG) . With rival Cheniere Energy (ASE: LNG) gearing up for an LNG export terminal in its Sabine Pass facility, we won't know for certain how things will play out until 2016 -- even assuming everything goes well with permitting and construction.
For Encana to improve, its attempts to diversify into natural gas liquids will help, but what it really needs is a rebound in dry gas prices. A continuing rebound could get Encana moving in the right direction again.
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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The article Has Encana Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. Motley Fool newsletter services recommend Nucor. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.