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 Rosetta Resources (Nasdaq: ROSE ) 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 Rosetta Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.1%||Fail|
|1-Year Revenue Growth > 12%||43.0%||Pass|
|Margins||Gross Margin > 35%||84.7%||Pass|
|Net Margin > 15%||23.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||38.1%||Pass|
|Current Ratio > 1.3||0.88||Fail|
|Opportunities||Return on Equity > 15%||19.1%||Pass|
|Valuation||Normalized P/E < 20||18.59||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Rosetta Resources last year, the company's score has soared by four full points. Improvement in revenue growth, profit margins, debt levels, and valuation have all improved its score, although the stock has dropped over the past year in light of weakening energy prices.
As a tiny player in the oil and gas industry, Rosetta is easy to lose in the crowd of energy plays right now. But the company was among the pioneers in the lucrative Eagle Ford area, which has turned into a huge profit producer for everyone in it. Giants Chesapeake Energy (NYSE: CHK ) and ExxonMobil (NYSE: XOM ) have significant positions in the Eagle Ford, but for Rosetta, Cabot Oil & Gas (NYSE: COG ) , and other smaller players, the area represents a make-or-break opportunity. Rosetta has also joined Newfield Exploration (NYSE: NFX ) in the Southern Alberta Basin region, although results there haven't been as strong as hoped.
But lately, the environment for energy companies has gotten decidedly more difficult. Natural gas prices have plunged for years, but until recently, oil prices had held up fairly well. Yet a big drop in crude oil has now thrown Rosetta and its peers for a loop, as early production companies rely on cash flow from the products they drill to help finance future growth.
As a result, Rosetta has disappointed investors with its financial results. In its last two quarterly reports, the company has badly missed earnings estimates, and even with a recent analyst upgrade, Rosetta still faces a lot of uncertainty in light of increased price volatility.
For Rosetta to keep improving, a return to $100 oil and a boost in natural gas prices would be immensely helpful. Even though the company has come a long way in the past year, it still needs further success if it wants to become a perfect stock.
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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