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 Quicksilver Resources (NYSE: KWK ) 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 Quicksilver Resources.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||20.1%||Pass|
|1-Year Revenue Growth > 12%||5.7%||Fail|
|Margins||Gross Margin > 35%||66.3%||Pass|
|Net Margin > 15%||40.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||183.5%||Fail|
|Current Ratio > 1.3||0.40||Fail|
|Opportunities||Return on Equity > 15%||39.6%||Pass|
|Valuation||Normalized P/E < 20||15.56||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, Quicksilver may not look like it's about to hit a gusher. But the company has seen strong earnings, and despite a market that doesn't look favorably on oil stocks, Quicksilver has plenty of potential going forward.
Quicksilver is an oil and gas exploration company with significant assets in new alternative production areas like the Barnett shale play. You'll find Quicksilver properties throughout the western U.S. and Canada .
Waves of consolidation have started hitting the industry, following ExxonMobil's (NYSE: XOM ) buyout of XTO Energy and the Chevron (NYSE: CVX ) /Atlas Energy merger. Most recently, BHP Billiton (NYSE: BHP ) decided to buy up Petrohawk Energy (NYSE: HK ) in a $12.1 billion deal.
Along with fellow industry players EOG Resources (NYSE: EOG ) and Provident Energy (NYSE: PVX ) , Quicksilver may end up benefiting from that trend. Fellow Fool Adam Crawford believes that Quicksilver might be a good prospect for ExxonMobil to take over. Yet if investors are hopeful, they should consider that the company faced a similar situation last fall without a buyout actually occurring.
Yesterday, Quicksilver had what looked like an amazing report, even if investors couldn't look past the overall market's big losses. Both sales and earnings came in well above analyst estimates.
Quicksilver's future prospects depend on its investment into its own business. The company said yesterday that it planned to increase exploration spending by nearly 40%. That's a gamble given how much oil prices have fallen lately, but as long as they stay relatively high, the move could be what ends up giving Quicksilver a shortcut toward becoming a perfect stock.
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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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.