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 Southwestern Energy (NYSE: SWN) 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 Southwestern Energy.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 28.7% Pass
  1-Year Revenue Growth > 12% 15% Pass
Margins Gross Margin > 35% 68.1% Pass
  Net Margin > 15% 21.7% Pass
Balance Sheet Debt to Equity < 50% 39.1% Pass
  Current Ratio > 1.3 0.80 Fail
Opportunities Return on Equity > 15% 20.2% Pass
Valuation Normalized P/E < 20 26.04 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Southwestern Energy weighs in with a quite reasonable score of 6. The energy company's major assets may seem outdated compared to recent developments in shale gas, but Southwestern is still pulling in strong profits.

Southwestern is a natural-gas exploration and production company, primarily focusing on the Fayetteville shale of Arkansas. Its main claim to fame is that it was one of the top performers of the 2000s, but perhaps more remarkable has been its ability to make big profits even as natural gas prices have remained stubbornly low.

One reason has been Southwestern's unwillingness to tread in risky waters. For instance, as competitors like Range Resources (NYSE: RRC) and Ultra Petroleum (NYSE: UPL) have moved into the Marcellus shale region, Southwestern is instead choosing to wait until regulatory concerns in New York and Pennsylvania over the effect of hydraulic fracturing sort themselves out.

In addition, Southwestern's production costs are quite low. Ultra even undercuts Southwestern, but both Range Resources and Chesapeake Energy (NYSE: CHK) have much higher costs.

Southwestern isn't the only player in the Fayetteville shale, but its first-mover status has intimidated some later arrivals. Late last year, Petrohawk Energy (NYSE: HK) sold off its Fayetteville assets to ExxonMobil (NYSE: XOM) rather than going up against Southwestern's strength.

Ultimately, though, Southwestern's future relies on gas prices going higher. Given the need for energy and the current price of alternatives like oil, that seems almost a foregone conclusion -- in which case Southwestern could continue moving closer to perfection in the years ahead.

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.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Ultra Petroleum and Range Resources. Motley Fool newsletter services have recommended buying shares of Range Resources and writing puts on Southwestern Energy. 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.