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 Pioneer Natural Resources (NYSE: PXD ) 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 Pioneer Natural Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||12.0%||Fail|
|1-Year Revenue Growth > 12%||41.9%||Pass|
|Margins||Gross Margin > 35%||72.7%||Pass|
|Net Margin > 15%||14.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||57.1%||Fail|
|Current Ratio > 1.3||1.14||Fail|
|Opportunities||Return on Equity > 15%||8.0%||Fail|
|Valuation||Normalized P/E < 20||33.42||Fail|
|Dividends||Current Yield > 2%||0.1%||Fail|
|5-Year Dividend Growth > 10%||(21.0%)||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Pioneer Natural Resources last year, the company has lost half of its points. Yet despite falling margins and a somewhat weaker balance sheet for the energy company, investors haven't been disappointed, as the stock is up more than 30% over the past year.
The energy industry has been a tale of two markets lately. Natural gas prices have been extremely low, hurting gas-intensive companies. Although gas giants Chesapeake Energy (NYSE: CHK ) and Range Resources (NYSE: RRC ) have taken steps to diversify their holdings, they still have fairly high exposure to natural gas prices.
Meanwhile, though, oil and natural gas liquids producers have enjoyed much higher prices. As energy maven T. Boone Pickens pointed out earlier this year, both Pioneer and Continental Resources (NYSE: CLR ) have done a good job of emphasizing more lucrative liquids over dry gas, with the company expecting 65% of its output to come from liquids during the next two years.
One potential catalyst for the company could come from an upgrade to its bond rating. Right now, Pioneer's debt is one step below investment grade, with ratings agency Fitch having a positive outlook on the company. A rise out of junk bond status could cut Pioneer's borrowing costs substantially. Southwestern Energy (NYSE: SWN ) has already seen the benefits that come from an upgrade, as it reached investment grade back in February after spending a decade in the junk bond world.
For Pioneer to keep improving, it would ideally like to see natural gas prices bounce off their lows while liquids and oil remain strong. That could help the company reduce debt and get its score moving back in the right direction.
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, you may want other options beyond Pioneer Natural Resources. We've got another stock you should also look at more closely. 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 Pioneer Natural Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.