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Is Magnum Hunter Resources the Perfect Stock?

Dan Caplinger
May 3, 2012

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 Magnum Hunter Resources (NYSE: MHR  ) 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 Magnum Hunter Resources.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 285.7% Pass
  1-Year Revenue Growth > 12% 294.8% Pass
Margins Gross Margin > 35% 60.1% Pass
  Net Margin > 15% (59.3%) Fail
Balance Sheet Debt to Equity < 50% 49.2% Pass
  Current Ratio > 1.3 0.46 Fail
Opportunities Return on Equity > 15% (20%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   4 out of 9

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

With only four points, Magnum Hunter Resources isn't drilling to perfection just yet. The company's sales growth has been spectacular, but so far, it hasn't found any profits to show for it.

Magnum is a small Houston-based oil and gas company with assets in a number of promising shale areas, including the Marcellus, Eagle Ford, and Williston Basin areas. The stock went through tough times throughout much of 2011, but a fourth-quarter pick-up that included bringing 11 new wells online helped boost its quarterly results. More importantly, with nearly 50% exposure to crude oil and natural gas liquids, Magnum has avoided the full brunt of the plunge in dry natural gas prices.

One up-and-coming area for Magnum is the Utica shale play. Chesapeake Energy (NYSE: CHK