Is Cabot 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 Cabot Oil & Gas (NYSE: COG  ) 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 Cabot Oil & Gas.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

2.3%

Fail

 

1-Year Revenue Growth > 12%

5.3%

Fail

Margins

Gross Margin > 35%

79.8%

Pass

 

Net Margin > 15%

15.9%

Pass

Balance Sheet

Debt to Equity < 50%

59%

Fail

 

Current Ratio > 1.3

1.07

Fail

Opportunities

Return on Equity > 15%

7.5%

Fail

Valuation

Normalized P/E < 20

103.35

Fail

Dividends

Current Yield > 2%

0.2%

Fail

 

5-Year Dividend Growth > 10%

(16.4%)

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With just two points, Cabot Oil & Gas doesn't look too energetic. But the energy producer is showing some signs of potentially turning the corner.

Cabot specializes in the unconventional energy plays that have taken the country by storm in recent years. In the Eagle Ford, Cabot partnered with EOG Resources (NYSE: EOG  ) to go up against competitors like Marathon Oil (NYSE: MRO  ) and Chesapeake Energy (NYSE: CHK  ) . Meanwhile, the company is also a big player in the Marcellus Shale region, going up against Range Resources (NYSE: RRC  ) and Anadarko Petroleum (NYSE: APC  ) as well as Chesapeake.

Those hot plays have produced strong returns, with Cabot topping the S&P 500 in year-to-date returns as of Sept. 30. Unfortunately, Cabot has developed a truly bad reputation. In Pennsylvania, 15 families sued the driller, accusing it of causing explosions and causing methane to seep into drinking water. It has also run into problems with state regulators on multiple occasions.

Earlier this week, though, Cabot announced very encouraging results. Although earnings fell short of estimates, sales rose 17%, and the company announced that it expected production to grow 45% to 55% next year. One analyst thinks even higher numbers are possible.

At its current valuation, Cabot is already priced for perfection without having delivered the goods. With the economy increasingly likely to avoid a double-dip recession, though, Cabot could benefit if energy prices start to rise in line with increased demand.

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 the best investments from the rest.

Click here to add Cabot 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. Motley Fool newsletter services have recommended buying shares of Range Resources and 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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