Is Contango 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 Contango Oil & Gas (AMEX: MCF  ) 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 Contango Oil & Gas.

 

Factor

 

What We Want to See

 

Actual

 

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

204.7%

Pass

 

1-Year Revenue Growth > 12%

28.2%

Pass

Margins

Gross Margin > 35%

88.1%

Pass

 

Net Margin > 15%

31.9%

Pass

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

2.62

Pass

Opportunities

Return on Equity > 15%

15.8%

Pass

Valuation

Normalized P/E < 20

15.23

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

 

 

 

 

 

Total Score

 

8 out of 10

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

With a score of eight, Contango Oil & Gas is digging up near-perfection. The energy company uses some interesting methods to reach success, and so far, it's led to some promising results.

Contango Oil & Gas isn't a typical natural gas company. It only has a handful of employees, choosing instead to outsource all of its exploration and paying contractors only when they make gas discoveries. That model gives Contango the lowest gas production costs in the industry -- a vital edge over high-cost producers Chesapeake Energy (NYSE: CHK  ) and Range Resources (NYSE: RRC  ) that helps it compete against other low-cost gas companies like Ultra Petroleum (NYSE: UPL  ) and Southwestern Energy (NYSE: SWN  ) .

Interestingly, with many producers focusing on shale gas plays, Contango largely avoided them. In an interview with the Fool in early 2010, CEO Ken Peak explained that the labor-intensive nature of shale wells, along with large capital commitments and declining production curves, made shale riskier than he wanted to take on.

Natural gas prices have remained stubbornly low, which has likely kept the lid on Contango's shares. But a big discovery in March showed just how much upside this company has. Contango may not be perfect yet, but it's hard to find a better example of a company that can weather tough conditions in its industry for years with great success.

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 Contango 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. The Motley Fool owns shares of Contango Oil & Gas, Ultra Petroleum, and Range Resources. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Range Resources, and Ultra Petroleum, along with writing puts in Southwestern 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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