I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: China Natural Gas (Nasdaq: CHNG). Is this provincial supplier of natural gas in China the real thing? Let's get to the numbers.

Foolish facts


China Natural Gas

CAPS stars (out of 5)


Total ratings


Percent bulls


Percent bears


Bullish pitches

229 out of 238

Highest rated peers

Transportadora de Gas Del Sur, Star Gas Partners (NYSE: SGU), Hong Kong and China Gas

Data current as of Sept. 25.

I'm neither a China expert nor a natural gas expert. So, for more on this stock, I turned to the cavalcade of Fools who have rated China Natural Gas to outperform in our Motley Fool CAPS database. They see a value play with growth potential.

"This company is growing. It still has to get its internal controls in order, that's what the material weaknesses and significant deficiencies are talking about in the reports, but they still have six months to address the weaknesses then it'll be clean for the annual. Anyways, might go down to 5 in short term, but the upside is there for it to skyrocket," Foolish investor believeit451 wrote in August.

The numbers support this thesis. According to Capital IQ, China Natural Gas trades for just 5.4 times current-year earnings, which are expected to be slightly down from last year. Next year, however, Wall Street expects earnings to rally 18%. This looks like a growth story in the making.

The elements of growth


Last 12 Months



Normalized net income growth




Revenue growth




Gross margin




Receivables growth




Shares outstanding

21.3 million

21.2 million

14.6 million

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately, the past doesn't give us a lot of great indicators. Let's review:

  • Normalized net income and revenue growth have moderated, neither of which we like to see in a potential growth stock.
  • On the other hand, I like that gross margins haven't collapsed. That's a good sign given volatile pricing in the natural gas market. Recently, Chinese regulators increased domestic prices 25%, The Wall Street Journal reports.
  • Finally, I like that receivables and revenue growth are moving more in tandem now than in years past.

Competitor and peer checkup


Normalized Net Income Growth (3 year)

China Natural Gas


China Petroleum & Chemical (NYSE: SNP)




PetroChina (NYSE: PTR)


Sinoenergy Corp. (Nasdaq: SNEN)

Not available

Source: Capital IQ. Data current as of Sept. 25.

Good news here: China Natural Gas has a growth pedigree. But we also can't get too hung up on history. As the table above shows, there has been a downtrend in financial performance. CNG is also a volatile stock, down more than 50% over the past year.

Grade: Unsustainable
To me, China Natural Gas looks more like a turnaround story than a growth story. That's not a bad thing. Betting on cheap stocks over shorter periods can create massive wealth. Legendary investor Benjamin Graham made a living out of it, and who am I to argue with old Ben? I've rated China Natural Gas a short-term outperform on my CAPS scorecard.

Now it's your turn to weigh in. Do you like China Natural Gas at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares of any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.