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.
What We Want to See
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.
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.
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