Is Gulfport Energy 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 Gulfport Energy (Nasdaq: GPOR  ) 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 Gulfport Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 35% Pass
  1-Year Revenue Growth > 12% 72.9% Pass
Margins Gross Margin > 35% 78.5% Pass
  Net Margin > 15% 46.3% Pass
Balance Sheet Debt to Equity < 50% 0.5% Pass
  Current Ratio > 1.3 0.90 Fail
Opportunities Return on Equity > 15% 27.3% Pass
Valuation Normalized P/E < 20 24.34 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   6 out of 10

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

With six points, Gulfport Energy does a great job of giving investors what they like to see. But a recent strategic move hasn't left shareholders very happy with the company.

Gulfport is a small exploration and production company that primarily focuses on Gulf oil fields off the shore of Louisiana and the Permian Basin in west Texas. However, it also has properties in several promising areas, including the Niobrara and Utica plays as well as Alberta's oil sands.

At least by one measure, Gulfport lands near the top of the charts. As fellow Fool Dan Dzombak observed back in September, Gulfport trails only Brigham Exploration (Nasdaq: BEXP  ) in economic value added, beating out both giant Chesapeake Energy (NYSE: CHK  ) as well as Carrizo Oil & Gas (Nasdaq: CRZO  ) .

In particular, Gulfport's 30,000-acre stake in the Utica shale presents some interesting strategic possibilities. Although the company's up against big competitors like Chesapeake, some analysts believe that successful small players could find themselves as acquisition targets. That has boosted interest in Gulfport as well as Magnum Hunter Resources (NYSE: MHR  ) and Rex Energy (Nasdaq: REXX  ) and is at least partially responsible for the stock's impressive gains over the past year.

But the company's most recent news shows that it's trying to cash in on its favorable stock performance. Earlier this week, Gulfport announced that it would offer 4 million shares in a secondary offering, with a current shareholder adding another 1 million shares to the offering. Although the stock plummeted on the news, the company intends to use its proceeds to pay down its credit facility and increase capital expenditures. In the long run, that move might pay off for shareholders.

Gulfport has the growth you'd like to see in a top stock, but its lack of dividend, though typical for a small company, leaves something to be desired. To reach perfection, Gulfport will either have to find a cash-producing gusher or present its shareholders with a buyout offer that's too good to refuse.

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 Gulfport Energy 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 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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  • Report this Comment On November 30, 2011, at 1:15 PM, gcmagone wrote:

    No risk, no reward is a truism. GPOR is as good as it gets in this regard.

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