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Has Quicksilver Resources Become the Perfect Stock?

http://www.fool.com/investing/general/2012/07/27/has-quicksilver-resources-become-the-perfect-stock.aspx

Dan Caplinger
July 27, 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 Quicksilver Resources (NYSE: KWK  ) 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 a 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 Quicksilver Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 16.3% Pass
  1-Year Revenue Growth > 12% (6.2%) Fail
Margins Gross Margin > 35% 55.3% Pass
  Net Margin > 15% 11.7% Fail
Balance Sheet Debt to Equity < 50% 158.2% Fail
  Current Ratio > 1.3 1.28 Fail
Opportunities Return on Equity > 15% 9.0% Pass
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   2 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.


Since we looked at Quicksilver Resources last year, the company's score has dropped by three points. Much weaker figures due to asset write-downs explain much of the drop, but falling revenue is also a bad sign and has definitely contributed to the stock's roughly 65% plunge in the past year.

Natural gas has been a terrible place to invest recently. With prices having set decade-long lows earlier this year, even cost-effective producers Ultra Petroleum (NYSE: UPL