Is C&J Energy Services 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 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.

Factor

What We Want to See

Actual

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.

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.

If you like energy stocks, we've got a stock idea that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time, so click here today.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Halliburton. 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.


Read/Post Comments (2) | Recommend This Article (11)

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.

  • Report this Comment On April 24, 2012, at 11:16 AM, murphopolis wrote:

    The frustrating thing about CJES coverage is that it fails to mention the elephant in the room, which is the tremendous short pressure. Short % of float is ~27% which is much higher than any of the bigger competitors. What are some of the reasons why this stock is shorted more than others? Are competitors shorting to setup an acquisition? Are institutions shorting to setup cheaper entries? Are IPO investors hedging? I don't have the answers and I don't know if these are the right questions, but I'd be curious to know if you have thoughts.

  • Report this Comment On April 25, 2012, at 1:31 AM, Edeskimo wrote:

    I'm not sure why this one has been so extensively shorted.

    In general, there has been a ton of pessimism in the land drillers and frackers the last half year.

    With more positive earnings reports, some confidence was returning to the market but then that is being eroded by new concerns about water requirements for fracking and the possibility of earthquakes from injected waste water from frack jobs.

    The other concern is this segment of the market is becoming over supplied with loss of margins and rapid commoditization of pumping.

    Right now I prefer the deep sea drillers like SDRL and RIG, Oceaneering international.

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