Is Enerplus 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 Enerplus (NYSE: ERF  ) 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 Enerplus.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (3.0%) Fail
  1-Year Revenue Growth > 12% 1.3% Fail
Margins Gross Margin > 35% 73.0% Pass
  Net Margin > 15% 9.8% Fail
Balance Sheet Debt to Equity < 50% 29.1% Pass
  Current Ratio > 1.3 0.27 Fail
Opportunities Return on Equity > 15% 3.3% Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 11.8% Pass
  5-Year Dividend Growth > 10% (15.6%) Fail
       
  Total Score   3 out of 9

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

With only three points, Enerplus doesn't seem to have much energy. The shares have plunged over the past year despite the company's huge dividend yield.

Enerplus is among an extensive group of companies that used to be set up as Canadian royalty trusts. The status gave Enerplus and peers Penn West Petroleum (NYSE: PWE  ) and Pengrowth Energy (NYSE: PGH  ) tax advantages over regular Canadian corporations. But after changes in Canadian tax law, Enerplus had to convert to corporate status, and like Penn West and Pengrowth, Enerplus cut its dividend in part to offset the higher tax costs.

Enerplus has also suffered from low natural-gas prices. With far-reaching holdings in the Marcellus and Bakken shale plays, the company has extensive exposure to natural gas. That's one reason why Enerplus announced an $800 million capital expenditure budget that will focus largely on producing more natural gas liquids, which fetch higher prices than dry gas.

The big question for Enerplus is what will happen with gas prices in the future. Even with Canadian peer EnCana (NYSE: ECA  ) and other industry leaders having chosen to cut back on production, the impact hasn't yet pushed prices higher. Eventually, the pressure of low prices could force Enerplus to cut its lucrative monthly dividend once more.

The best path to success for Enerplus is for natural gas prices to rise. Until that happens, though, Enerplus could have difficulty getting much closer to perfection.

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.

If you like energy stocks, we've got a stock idea that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free, but only available for a limited time, so click here today.

Click here to add Enerplus 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 in this article. 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.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1875653, ~/Articles/ArticleHandler.aspx, 9/30/2014 12:10:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement