Is Magnum Hunter Resources 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 Magnum Hunter Resources (NYSE: MHR  ) 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 Magnum Hunter Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 285.7% Pass
  1-Year Revenue Growth > 12% 294.8% Pass
Margins Gross Margin > 35% 60.1% Pass
  Net Margin > 15% (59.3%) Fail
Balance Sheet Debt to Equity < 50% 49.2% Pass
  Current Ratio > 1.3 0.46 Fail
Opportunities Return on Equity > 15% (20%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 9

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

With only four points, Magnum Hunter Resources isn't drilling to perfection just yet. The company's sales growth has been spectacular, but so far, it hasn't found any profits to show for it.

Magnum is a small Houston-based oil and gas company with assets in a number of promising shale areas, including the Marcellus, Eagle Ford, and Williston Basin areas. The stock went through tough times throughout much of 2011, but a fourth-quarter pick-up that included bringing 11 new wells online helped boost its quarterly results. More importantly, with nearly 50% exposure to crude oil and natural gas liquids, Magnum has avoided the full brunt of the plunge in dry natural gas prices.

One up-and-coming area for Magnum is the Utica shale play. Chesapeake Energy (NYSE: CHK  ) and EV Energy Partners (Nasdaq: EVEP  ) have much greater acreage in the area, although EV Energy is likely to start converting its Utica holdings to cash. But Magnum has been buying up assets in the area and sees some real potential there.

Another plus for Magnum is its midstream Eureka Hunter Pipeline division. While mammoth pipeline operators Kinder Morgan Energy Partners (NYSE: KMP  ) and Enterprise Products Partners (NYSE: EPD  ) fight it out in a war of acquisition and consolidation, Magnum's pipeline subsidiary is a small but important link that runs from Ohio to Pennsylvania. If the Utica shale area goes well, Magnum could expand midstream services there as well.

To keep striving for perfection, Magnum needs to sustain swift growth rates while finding a way to work back to profitability. A move up in gas prices would help there, but it may simply take time for Magnum's capital investments to bear fruit.

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 Magnum Hunter 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 in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Enterprise Products Partners. 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 (0)

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: 1878445, ~/Articles/ArticleHandler.aspx, 10/26/2014 1:21:55 AM

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