Is Range Resources the Perfect Stock?

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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Range Resources (NYSE: RRC  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Range Resources.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 14% fail
  1-Year Revenue Growth > 12% 9.3% fail
Margins Gross Margin > 35% 82.1% pass
  Net Margin > 15% 6.8% fail
Balance Sheet Debt to Equity < 50% 71.9% fail
  Current Ratio > 1.3 0.73 fail
Opportunities Return on Equity > 15% 2.5% fail
Valuation Normalized P/E < 20 NM fail
Dividends Current Yield > 2% 0.4% fail
  5-Year Dividend Growth > 10% 25% pass
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Range Resources had negligible normalized earnings. Total score = number of passes.

With a score of just 2 points, Range Resources hardly seems worthy of further consideration. But in an industry that has seen tough times for years, some believe the company is poised to recover strongly.

Range Resources is a natural gas producer. That's pretty much all you need to say to explain the company's ugly financials in the recent past, as gas prices have remained stubbornly low even as prices of other commodities have gone through the roof. A range of new shale-gas discoveries has created a glut of the clean-burning fuel, and demand hasn't stepped in to push prices higher.

Despite the long-term promise of unconventional gas, low prices have been bad news for many natural gas producers. Both Goodrich Petroleum (NYSE: GDP  ) and Delta Petroleum (Nasdaq: DPTR  ) , for example, have relatively high cost structures that make low natural gas prices very difficult to endure.

But as the key player in the Marcellus shale area in the eastern U.S., Range Resources has potential reserves numbering in the tens of trillions of cubic feet. That gives the company plenty of time to look for natural gas prices to return to more reasonable levels. And with both ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) having made major acquisitions of natural gas companies, Range Resources gives investors a chance at gains from a potential takeover target as well.

Range Resources doesn't have the pedigree as a perfect stock yet. But as with many commodity-related companies, Range Resources could look a whole lot better once the long-awaited jump in natural gas prices actually surfaces.

Keep searching
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.

Click here to add Range Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Chevron is a Motley Fool Income Investor recommendation. The Fool owns shares of ExxonMobil. 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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