Has Cabot Oil & Gas 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 Cabot Oil & Gas (NYSE: COG  ) 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 Cabot Oil & Gas.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

9.2%

Fail

 

1-Year Revenue Growth > 12%

20.5%

Pass

Margins

Gross Margin > 35%

75.6%

Pass

 

Net Margin > 15%

10.6%

Fail

Balance Sheet

Debt to Equity < 50%

47.0%

Pass

 

Current Ratio > 1.3

0.54

Fail

Opportunities

Return on Equity > 15%

5.7%

Fail

Valuation

Normalized P/E < 20

107.56

Fail

Dividends

Current Yield > 2%

0.2%

Fail

 

5-Year Dividend Growth > 10%

9.2%

Fail

       
 

Total Score

 

3 out of 10

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

Since we looked at Cabot Oil & Gas last year, the company has picked up a point, with sales growth picking up substantially over 2011's figures. The stock has also done pretty well, gaining 30% over the past year.

Cabot has had to deal with a challenging environment in the booming natural gas industry. On one hand, it has seen amazing production from its holdings in the Marcellus shale play. Yet low natural gas prices have hurt the company's profitability along with the entire industry, as producers Chesapeake Energy (NYSE: CHK  ) , Southwestern Energy (NYSE: SWN  ) , and many of their peers have bitten the bullet and chosen to emphasize oil and natural-gas liquids over uneconomical dry gas production.

Another controversial issue is Cabot's use of hydraulic fracturing. With the EPA looking closely at both Cabot and Encana (NYSE: ECA  ) in connection with possible groundwater damage, new federal rules could change the industry's landscape. Moreover, like fellow Marcellus producer Range Resources (NYSE: RRC  ) , Cabot faces the threat that state and local regulators could change their stances on unconventional production.

In its most recent earnings report, Cabot managed to beat earnings estimates but fell short on revenue. The company has had to deal with delays in acquiring necessary permits, but with a 31% increase in dry gas production and a 61% rise in liquids production, Cabot is following a path that should produce big gains when gas prices rise more substantially.

For Cabot to improve, it really needs just one thing: rising natural gas prices. Once that comes, Cabot investors should see rising dividends, better profits, and healthier returns, pushing the stock that much closer to perfection.

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.

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Click here to add Cabot Oil & Gas to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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