Has Southwestern Energy 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 Southwestern Energy (NYSE: SWN  ) 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 Southwestern Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 29.0% Pass
  1-Year Revenue Growth > 12% 12.0% Pass
Margins Gross Margin > 35% 68.3% Pass
  Net Margin > 15% 20.8% Pass
Balance Sheet Debt to Equity < 50% 40.2% Pass
  Current Ratio > 1.3 1.28 Fail
Opportunities Return on Equity > 15% 16.8% Pass
Valuation Normalized P/E < 20 15.30 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10%                     0% Fail
       
  Total Score   7 out of 10

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

Since we looked at Southwestern Energy last year, the company has picked up a point. The roughly 30% drop in its stock price over the past year has brought valuations down to much healthier levels, even though flagging natural gas prices cast a pall over the company's future prospects.

It's been a tough year for natural-gas drillers. Gas prices plunged to decade lows, forcing Southwestern and other leaders like Chesapeake Energy (NYSE: CHK  ) to cut production. Yet while Chesapeake and SandRidge Energy (NYSE: SD  ) have adjusted their production toward oil and gas liquids, Southwestern remains squarely focused on dry gas.

Southwestern is somewhat insulated from the bear market in natural gas because of its low-cost structure. But natural gas has fallen so far and so quickly that even it and fellow low-cost provider Ultra Petroleum (NYSE: UPL  ) are feeling the pinch. In fact, Southwestern has held up a lot better than many of its peers, despite its big drop.

In an attempt to jump-start demand, Southwestern took the unusual step of giving away gas-powered trucks earlier this year. With Westport Innovations (Nasdaq: WPRT  ) working hard to develop gas-powered engines that could eventually find their way into the mass market, Southwestern's move drew attention to the potential that gas has as a game-changer in transportation.

Don't look for Southwestern to make a big shift away from gas. What Southwestern needs in order to improve is simple: higher natural gas prices. When that happens, Southwestern should be in prime position to reverse its recent setbacks and thrive as a leader in the industry.

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 think energy is the place to be, 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 Southwestern Energy 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. The Motley Fool owns shares of Westport Innovations, Ultra Petroleum, and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Ultra Petroleum, and 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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