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 and then decide whether EOG Resources
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. Although 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.
- Moneymaking 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 EOG Resources.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 10.2% | Fail |
| 1-Year Revenue Growth > 12% | 44.9% | Pass | |
| Margins | Gross Margin > 35% | 63.5% | Pass |
| Net Margin > 15% | 2.8% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 44.8% | Pass |
| Current Ratio > 1.3 | 1.44 | Pass | |
| Opportunities | Return on Equity > 15% | 1.6% | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 0.6% | Fail |
| 5-Year Dividend Growth > 10% | 28.3% | Pass | |
| Total Score | 5 out of 9 |
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful because of negative earnings. Total score = number of passes.
With a score of 5, EOG Resources falls into the middle of our scale. The natural-gas giant has built an impressive position in emerging shale-gas plays, but with natural-gas prices down, the company has had to scurry to reposition itself as a more balanced energy player.
EOG was fortunate enough to be an early player in North Dakota's Bakken region, as well as in more recent finds such as the Eagle Ford shale area and the Barnett Combo. But as oil prices skyrocketed while natural gas languished, gas-heavy companies such as Chesapeake Energy
One interesting area where EOG plays a major role is in the Eagle Ford. Although the area seemed to be just another gas find at first, EOG later discovered huge reserves of oil as well, prompting companies such as Goodrich Petroleum
Despite its attempts to broaden its energy exposure, EOG's fortunes remain tightly linked to the natural-gas market generally and to unconventional gas plays in particular. With practices such as fracking raising concerns, EOG may face headwinds for a while. In the end, though, what will make EOG a perfect stock is for natural-gas prices to rise from their years-long trough and start delivering returns to shareholders.
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.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. We Fools don't 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.
