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 Petrohawk Energy
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 Petrohawk Energy.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||38.1%||Pass|
|1-Year Revenue Growth > 12%||32.7%||Pass|
|Margins||Gross Margin > 35%||51.2%||Pass|
|Net Margin > 15%||1.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||84.1%||Fail|
|Current Ratio > 1.3||0.54||Fail|
|Opportunities||Return on Equity > 15%||2.3%||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||3 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative normalized earnings over the period. Total score = number of passes.
With a score of 3, Petrohawk Energy isn't drilling up perfection. The energy company has found plenty of promising prospects, but challenging conditions in natural gas have kept a lid on the stock's upside.
Petrohawk was fortunate enough to be one of the first oil and gas companies to get into the Eagle Ford shale play in south Texas, which has been the primary contributor to the company's explosive growth. In 2009, the company spent $450 million building up acreage there and in the Haynesville shale play.
The company has essentially bet the farm on these two areas, as it sold its properties in the Fayetteville play to ExxonMobil
The problem Petrohawk faces is one common to the entire industry: Natural gas prices have fallen sharply. Although low-cost producers like Ultra Petroleum
The main question facing Petrohawk is whether Eagle Ford will produce enough liquids to outlast the long bear market in natural gas prices. If so, then Petrohawk could move toward perfection in a hurry.
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. The Motley Fool owns shares of Ultra Petroleum and Range Resources. Motley Fool newsletter services have recommended buying shares of Range Resources and Chesapeake 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.