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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 Continental Resources (NYSE: CLR ) 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 Continental Resources.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||31.4%||Pass|
|1-year revenue growth > 12%||63.0%||Pass|
|Margins||Gross margin > 35%||81.7%||Pass|
|Net margin > 15%||39.2%||Pass|
|Balance sheet||Debt to equity < 50%||80.8%||Fail|
|Current ratio > 1.3||0.86||Fail|
|Opportunities||Return on equity > 15%||33.6%||Pass|
|Valuation||Normalized P/E < 20||17.34||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 Continental Resources last year, the company has picked up two points. With margins and return on equity rising, the company looks more attractively valued on an earnings-multiple basis even after a 50% gain for the stock.
Among oil and gas exploration and production companies, Continental was definitely in the right place at the right time. With the largest land position in the Bakken shale play of North Dakota and eastern Montana, Continental has become one of the top 10 petroleum liquids producers in the nation. That's been an extremely important focus lately, as more natural-gas-focused companies Chesapeake Energy (NYSE: CHK ) and Encana (NYSE: ECA ) have struggled to shift more of their production from gas to oil and liquids, whose prices are much more attractive.
More recently, the stock has given back some ground as crude oil prices have fallen. But CEO Harold Hamm still expects big production increases, with a 40% jump this year helping the company reach its goal of tripling production levels within five years.
Still, everyone seems to believe the Bakken has huge potential. Kodiak Oil & Gas (NYSE: KOG ) has benefited from reducing open space between wells, a technique that has worked well for EOG Resources (NYSE: EOG ) and other competitors in helping to maximize production while minimizing costs. With even healthier margins than Kodiak, Continental is already showing how cost controls can boost profits.
For Continental to improve, it needs to focus on its balance sheet. Debt has risen somewhat recently, but as the company makes the most of its Bakken assets, it should be able to keep debt under control and eventually start paying a dividend. That could make the stock look even better in the near future.
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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