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 C&J Energy Services (NYSE: CJES ) 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 C&J Energy Services.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||129.9%*||Pass|
|1-Year Revenue Growth > 12%||210.6%||Pass|
|Margins||Gross Margin > 35%||41.5%||Pass|
|Net Margin > 15%||21.4%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||2.83||Pass|
|Opportunities||Return on Equity > 15%||64.2%||Pass|
|Valuation||Normalized P/E < 20||5.33||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes. * Three-year growth rate.
With eight points, C&J posts a great score for a young company. As a company helping with an up-and-coming technology in the energy industry, C&J has huge potential to see its growth rate continue into the future.
C&J is at the forefront of the shale gas industry, providing hydraulic fracturing services and materials necessary for horizontal drilling. Operating in the energy-rich areas in New Mexico, Texas, Oklahoma, and Louisiana, the company serves a distinguished clientele of exploration and production companies that includes EXCO Resources (NYSE: XCO ) and EOG Resources (NYSE: EOG ) .
C&J is doing everything right operationally. It's been able to expand without taking on debt, and it plans to boost its hydrofracking fleet by 50% to nine units by the end of the year. With all of its rigs in oil and liquids production, C&J also doesn't stand to lose out from planned natural gas production cuts.
Of course, hydraulic fracturing has also attracted attention from much larger competitors. Halliburton (NYSE: HAL ) is becoming a giant in U.S. shale gas, dwarfing C&J in size although reaping a much slower growth rate. That may be why C&J shares have lost nearly half their value since the company's IPO last July.
For C&J to stay on top, it needs to keep growing and survive assaults on hydrofracking as an industry practice. With no dividend likely in the near future, C&J won't reach perfection, but it's a potential growth monster if the hydrofracking market keeps expanding.
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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