Is Pioneer Natural Resources 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 Pioneer Natural Resources (NYSE: PXD  ) 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 Pioneer Natural Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.5% Fail
  1-Year Revenue Growth > 12% 24.1% Pass
Margins Gross Margin > 35% 73.7% Pass
  Net Margin > 15% 39.2% Pass
Balance Sheet Debt to Equity < 50% 53.4% Fail
  Current Ratio > 1.3 1.42 Pass
Opportunities Return on Equity > 15% 7% Fail
Valuation Normalized P/E < 20 37.35 Fail
Dividends Current Yield > 2% 0.1% Fail
  5-Year Dividend Growth > 10% (19.7%) Fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With only four points, Pioneer Natural Resources isn't close to perfection just yet. But the oil and gas exploration and production company looks like it might have a far better future ahead of it.

For a long time, Pioneer was best known for its operations in the West Texas Spraberry field, along with scattered holdings throughout the Southern Plains. Although many of older fields had been thought to be uneconomical, new recovery methods have restored new life to formerly abandoned fields.

Recently, though, Pioneer made moves to get into one of the hottest shale energy plays: the Eagle Ford. By selling off its Tunisian properties last year -- a timely move given the country's political unrest earlier this year -- Pioneer got cash to build up its acreage in the Eagle Ford. That puts the company squarely in competition with giants Chesapeake Energy (NYSE: CHK  ) , EOG Resources (NYSE: EOG  ) , and Petrohawk (NYSE: HK  ) . But along with other smaller players like Rosetta Resources (Nasdaq: ROSE  ) , Pioneer has the potential to give shareholders a lot more bang for their buck than those more-established players.

Of course, small companies like Pioneer also face greater risk. As energy prices have fallen sharply, Pioneer has lost more than a quarter of its share value in about a month. Until the company's big growth prospects actually come through, Pioneer will fall short of being a perfect stock.

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 Pioneer Natural Resources 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. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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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