Is Kodiak Oil & Gas the Perfect Stock?

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 Kodiak Oil & Gas (AMEX: KOG  ) 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 Kodiak Oil & Gas.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 97.9% Pass
  1-Year Revenue Growth > 12% 138.6% Pass
Margins Gross Margin > 35% 79.0% Pass
  Net Margin > 15% (27.4%) Fail
Balance Sheet Debt to Equity < 50% 13.6% Pass
  Current Ratio > 1.3 3.66 Pass
Opportunities Return on Equity > 15% (5.8%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   5 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.

Kodiak scores five points, showing that despite its strong growth, it isn't approaching perfection just yet. But the company has seen some big success, and it may well get snapped up as a takeover candidate before it gets too much bigger.

Kodiak is an oil and gas exploration and production company that focuses on the Bakken region of Montana and North Dakota. Unlike some of its peers, such as Hyperdynamics (AMEX: HDY  ) , Kodiak actually has wells in production.

Kodiak isn't alone in trying to take advantage of the Bakken. Rivals like Continental Resources (NYSE: CLR  ) and Brigham Exploration (Nasdaq: BEXP  ) have ambitious expansion plans of their own. But Kodiak's increasing capital expenditure, part of which it's using to acquire more mineral acreage, shows confidence in its prospects in the region -- while still leaving the company with a healthy balance sheet that would allow even more growth in the future.

Fellow Fool Dan Dzombak thinks that with its 69,000-acre position in the Bakken, which gives the company the unusual bonus of getting to drill into two formations from the same drill site, Kodiak is likely to attract buyout offers from ConocoPhillips (NYSE: COP  ) or other acquisitive larger producers.

With shares having more than doubled since September, it's hard to say that Kodiak is a screaming bargain right now. But speculative exploration and production companies often trade at what appear to be high valuations until they either die out or hit it rich. If Kodiak can do the latter, then shareholders will see it as a perfect stock in time.

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 Kodiak Oil & Gas to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.


Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 07, 2011, at 10:47 AM, mateonelson wrote:

    they just acquired 25000 more acres last week. So the 69000 figure is wrong.

  • Report this Comment On June 07, 2011, at 10:02 PM, naga2 wrote:

    the perfect stock does exist-apwc on the nasdaq

    1. rev 465 million

    2. 1.02 net income/sh 13.8 million shares

    3. total stated book including minority interest- 16.00

    4. total cash 5.50/sh

    5.growth rate 30%

    6. trailing 12 PE 4.3X

    7. top five auditor - ernst and young

    8. psr around .10

    9. trading less than 1/3 total book

    10. trading 1 dollar less than cash value

    11.copper wire producer in asia -- not a china based company

    12. growth coming from thailand, singapore, australia and china

    current share price $4.35

    cheapest stock in the world- first q should be post within 1 to 2 weeks - from conference call -"business is strong"

  • Report this Comment On June 07, 2011, at 10:12 PM, soycapital wrote:

    apwc

    Ahh yes the perfect stock! My My where have you been?

  • Report this Comment On June 07, 2011, at 10:22 PM, naga2 wrote:

    copper prices are always the indicator of economic growth and if you look at copper the price is not far from all time high~ currently @ 4.15/lb~ the company produces wire for the power industry and telco industry- they own 51% of charoong wire and cable of thailand( public company)- if the fools really wanted a "perfect"

    stock- i dare them to prove me wrong! Note: they hated kog and bexp for very long time before they started to love them!

  • Report this Comment On June 08, 2011, at 1:23 PM, thirdcoast wrote:

    Thanks for the pointless contribution about HDY. They are not producing their 9650 sq mile oil province yet. They got the drillship, cash and are on schedule to drill q4 this year.

    "Unlike KOG's 69,000 acres to explore, HDY has a 6,000,000 acre asset explore."

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