Is PetroQuest Energy 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 PetroQuest Energy (NYSE: PQ  ) 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 PetroQuest Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (3.8%) Fail
  1-Year Revenue Growth > 12% (12.9%) Fail
Margins Gross Margin > 35% 75.5% Pass
  Net Margin > 15% 6.1% Fail
Balance Sheet Debt to Equity < 50% 69.2% Fail
  Current Ratio > 1.3 1.01 Fail
Opportunities Return on Equity > 15% 4.6% Fail
Valuation Normalized P/E < 20 20.47 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   1 out of 10

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

With only one point, PetroQuest Energy isn't leaving investors feeling energetic. But the tiny oil and gas producer actually packs more potential than its score suggests.

Anyone who's looked at stocks that have exposure to natural gas knows just how painful the past few years have been. With prices having fallen from 2008 levels above $10 per thousand cubic feet to the $4 to $5 range, many companies have suffered almost guaranteed losses. Although companies like Southwestern Energy (NYSE: SWN  ) and Range Resources (NYSE: RRC  ) that have lower break-even prices can survive in a low-price environment, higher-cost producers like PetroQuest and Quicksilver Resources (NYSE: KWK  ) have a lot more trouble.

In fact, PetroQuest's most recent quarterly results show the impact of low gas prices. With higher operating expenses also hitting the bottom line, the company is struggling to stay profitable.

But like bigger competitors SandRidge Energy (NYSE: SD  ) and Chesapeake Energy (NYSE: CHK  ) , PetroQuest has a presence in the promising Mississippi Lime area. Its net acreage is tiny compared to that of its peers, but with its potential for both oil and gas production, PetroQuest can enjoy the more favorable prices for liquids right now.

Going forward, PetroQuest needs energy prices to move in its favor. If natural gas rebounds, then the company could see recent revenue drops turn around in a big hurry -- and the stock move a lot 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 the best investments from the rest.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Southwestern Energy, Range Resources, and Chesapeake Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Related Tickers

12/18/2014 4:02 PM
PQ $3.70 Up +0.29 +8.50%
PetroQuest Energy,… CAPS Rating: *
CHK $19.14 Up +0.46 +2.46%
Chesapeake Energy CAPS Rating: ****
KWK $0.34 Down -0.03 -7.81%
Quicksilver Resour… CAPS Rating: ***
RRC $60.09 Down -1.82 -2.94%
Range Resources CAPS Rating: **
SD $1.82 Down -0.17 -8.54%
SandRidge Energy CAPS Rating: ***
SWN $30.71 Up +0.51 +1.69%
Southwestern Energ… CAPS Rating: ****

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