Has Comstock Resources 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, and then decide whether Comstock Resources (NYSE: CRK  ) 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 a 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 Comstock Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

4.2%

Fail

 

One-year revenue growth > 12%

13.8%

Pass

Margins

Gross margin > 35%

78.4%

Pass

 

Net margin > 15%

(15.8%)

Fail

Balance sheet

Debt to equity < 50%

122.5%

Fail

 

Current ratio > 1.3

0.44

Fail

Opportunities

Return on equity > 15%

(6.8%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

Five-year dividend growth > 10%

0%

Fail

       
 

Total score

 

2 out of 9

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

Since we looked at Comstock Resources last year, the company has seen its score double, thanks to rising revenue in the past year. The stock, though, hasn't done nearly as well, falling about 5% since this time last year.

Comstock is a small, Texas-based oil and gas exploration and production company. With its operations focused largely on Texas and the surrounding area, it has extensive reserves of oil and, particularly, natural gas.

Like many natural-gas-heavy companies, Comstock has had a tough time dealing with rock-bottom natural-gas prices. A recent bounce in gas has helped Comstock and many of its peers, but most larger players in the industry, including SandRidge Energy (NYSE: SD  ) and Chesapeake Energy (NYSE: CHK  ) , have shifted their production focus to higher-priced oil.

Comstock has also gotten some negative feedback from a corporate standpoint. Late last year, GMI Ratings put Comstock on its risk list of companies based on governance measures. Comstock showed up due to its compensation structure and its accounting practices, as well as certain environmental issues.

But when Comstock shares hit bottom earlier this year, value investors came into the space because of its long-term prospects. Analysts at Capital One Southcoast pretty much nailed the bottom in upgrading Comstock, along with Kodiak Oil & Gas (NYSE: KOG  ) and Rosetta Resources (NASDAQ: ROSE  ) , based on valuation and an expected rebound in the industry.

For Comstock to improve, further gains in gas prices would be ideal. Barring a big unexpected discovery, though, it'll take a long time before Comstock gets appreciably closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Like Comstock, Kodiak Oil & Gas is a dynamic growth story, but with great opportunities come great risks. Before you hitch your horse to this carriage, let us help you with your due diligence. To see whether Kodiak is currently a buy or sell, check out our new premium report, which gives information on Kodiak and its competitors. Click here to get your report today.

Click here to add Comstock Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2152421, ~/Articles/ArticleHandler.aspx, 4/20/2014 10:25:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement