Has Range Resources Become 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 Range Resources (NYSE: RRC  ) 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 Range Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.1% Fail
  1-Year Revenue Growth > 12% 41.7% Pass
Margins Gross Margin > 35% 83.3% Pass
  Net Margin > 15% (23%) Fail
Balance Sheet Debt to Equity < 50% 76.9% Fail
  Current Ratio > 1.3 0.71 Fail
Opportunities Return on Equity > 15% (11.9%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.3% Fail
  5-Year Dividend Growth > 10% 14.6% Pass
       
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Range Resources last year, the natural gas producer has picked up a point. But the acceleration in revenue growth masks weak conditions in the industry that will continue to be a challenge.

Range Resources has struggled in a terrible environment for natural gas prices. With gas near a decade low, the company hasn't been able to stay profitable, given its relatively high production costs. Just earlier this week, Chesapeake Energy (NYSE: CHK  ) , which also suffers from a high cost structure, announced plans to slash its natural gas production in light of low prices. Other producers have simply shifted away from gas, with SandRidge Energy (NYSE: SD  ) having increasingly focused on oil and liquids over natural gas.

But the company still has long-term promise. Its move into the Marcellus Shale has given it a competitive advantage there, and so far, its results in the Marcellus have been very promising. But concerns about seismic events that some have tried to tie to hydraulic fracturing pose a potential threat for the entire industry.

For Range Resources to get closer to perfection, it needs to work on getting its costs down. Until it does, lower-cost providers Ultra Petroleum (NYSE: UPL  ) and Southwestern Energy (NYSE: SWN  ) will have a huge competitive advantage and be better able to outlast Range Resources in a prolonged natural gas slump. If gas rebounds, however, Range Resources could be among the biggest winners.

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.

Range Resources may not be the best stock out there right now, but we've got some other ideas you should check out. Please accept this invitation to receive the Fool's latest special report absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

Click here to add Range Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Range Resources, Ultra Petroleum, and Chesapeake Energy, as well as 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 01, 2012, at 12:10 AM, MHedgeFundTrader wrote:

    Natural gas finally got some good news last week. First, major producer, Chesapeake Energy (CHK) announced that it was cutting its natural gas production by 50%, taking some immediate pressure off the market. Sure, (CHK) is just one company, but others may follow suit.

    Second, at the urging of my friend, Boone Pickens, Present Obama announced funding of some natural gas corridors in his State of the Union address. These are chains of natural gas stations placed every 100 miles stretching from east to west and north to south that would allow heavy trucks on transcontinental routes to refuel. This would provide the extra incentive for these 18 wheelers to convert from diesel fuel to CH4 at a nominal cost and put a major dent in our oil imports.

    The news was enough to trigger a massive short covering rally in this most unloved of molecules. The spot market soared 25%, from $2.25 to $2.82 per MBTU’s, while the ETF (UNG) leapt from $5 to $6.

    I am going to call the bluff of the market here and buy the United States Natural Gas Fund April, 2012 $6 puts at $0.65 or best. That way I can take advantage of the huge contango that exists between the spot and forward markets for natural gas futures contracts. To avoid actually drilling its own wells, the (UNG) buys forward contracts at huge premiums and holds them until they expire at spot. They then roll the cash forward into new contracts and repeat the process. It is one of the best wealth destruction machines I have ever seen and explains why (UNG) has, by far, outperformed natural gas on the downside. It is a great thing to be short.

    The Mad Hedge Fund Trader

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