Has Goodrich Petroleum 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 Goodrich Petroleum (NYSE: GDP  ) 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 Goodrich Petroleum.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

13.2%

Fail

 

1-Year Revenue Growth > 12%

(1%)

Fail

Margins

Gross Margin > 35%

73.1%

Pass

 

Net Margin > 15%

(16.8%)

Fail

Balance Sheet

Debt to Equity < 50%

419.1%

Fail

 

Current Ratio > 1.3

0.48

Fail

Opportunities

Return on Equity > 15%

(20.4%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

1 out of 9

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

Since we looked at Goodrich Petroleum last year, the company has lost two points, as revenue growth has entirely disappeared. The stock has also hurt investors, losing about 40% over the past year.

Goodrich is a small independent exploration and production company, with stakes in plenty of promising plays. The Eagle Ford has been a lucrative area for many small E&P players, as Cabot Oil & Gas (NYSE: COG  ) looks to the play as a chance to add oil production to offset natural gas exposure elsewhere. The Haynesville and Tuscaloosa Marine shale plays have also gained notice lately, as EOG Resources (NYSE: EOG  ) conducts dry-gas operations in the Haynesville, and Devon Energy (NYSE: DVN  ) and Contango Oil & Gas (NYSEMKT: MCF  ) both have interests in the Tuscaloosa Marine that they're looking to contribute to revenue going forward.

But Goodrich hasn't seen the success that many had anticipated. After aggressive plans to boost production, investors turned bullish on the stock. But throughout the year, the company hasn't been able to deliver on those prospects. Last week, Goodrich dropped 16% in a single day after its third-quarter earnings included a revenue drop of 17% and a much bigger loss than expected. With total production continuing to fall, Goodrich is still stuck in the same malaise that has plagued many of its natural-gas-heavy peers.

For Goodrich to recover, it needs natural gas prices to get back to reasonable levels. If that happens, then the company will be able to start repaying debt and dam the flow of red ink on its income statement as it tries to get at least a little 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 Goodrich Petroleum to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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