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 and then decide whether QEP Resources 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.
Moneymaking 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%
1 out of 9
Source: S&P Capital IQ. NM = not meaningful; QEP started paying a dividend in August 2010. Total score = number of passes.
Since we looked at QEP Resources last year, the company has dropped a point, with revenue plunging during 2012. The stock has also been stuck in the doldrums, losing about 10% over the past year.
Despite its small size, QEP has become a recognized player in the red-hot Bakken shale play. Last summer, the company spent a whopping $1.38 billion to acquire 27,600 net acres in the Bakken. The $50,000-per-acre price raised concerns that QEP may have overpaid, especially since Bakken leader Continental Resources was able to make a similarly sized acquisition for less than $10,000 per acre. But with the land giving QEP 125 million barrels in proved and probable reserves, the economics actually work out reasonably well for QEP, even though fellow Bakken player Kodiak Oil & Gas has been trading at a lower valuation based on production and reserves.
More recently, though, QEP has decided to take some of its midstream assets, including gas-gathering facilities in Wyoming and North Dakota, and package them into an initial public offering of units in a newly formed master limited partnership. The move follows a trend that Phillips 66 helped bring about, with its own midstream MLP expected later this year that will cover pipeline, terminal, rail, and gas-liquids facilities. For QEP, the company hopes to raise $300 million to $400 million to fund operations and reduce debt.
For QEP to improve, it needs to keep up with its trend of emphasizing oil and liquids production over dry gas, at least as long as natural gas prices remain low. If a rebound in nat-gas finally comes, then QEP stands to be one of the biggest beneficiaries.
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.
There are many different ways to play the energy sector, and The Motley Fool's analysts have uncovered what they're calling The Only Energy Stock You'll Ever Need. They're sharing their findings in a special free report that thousands of investors have already benefited from. Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.
Click here to add QEP Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has QEP Resources Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.