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 Goodrich Petroleum (NYSE: GDP) 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 Goodrich Petroleum.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 18.4% Pass
  1-Year Revenue Growth > 12% 28.9% Pass
Margins Gross Margin > 35% 81.3% Pass
  Net Margin > 15% (15.7%) Fail
Balance Sheet Debt to Equity < 50% 339.3% Fail
  Current Ratio > 1.3 0.80 Fail
Opportunities Return on Equity > 15% (15.3%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

With only three points, Goodrich Petroleum hasn't yet hit a gusher for investors. The small driller has plenty of promising plays, but so far, none has gotten rid of the red ink on its bottom line.

Goodrich is a relatively small player in the oil and gas industry. Like ATP Oil & Gas (Nasdaq: ATPG) with its highly leveraged offshore drilling operations, Goodrich relies on massive amounts of debt to finance its business. Such moves are inevitably gambles that overall growth can outpace the rising challenges of servicing that debt, and given that the company still isn't profitable, it's a scary gamble right now.

But Goodrich is still trying to expand. Earlier this year, Goodrich joined rivals Devon Energy (NYSE: DVN) and Denbury Resources (NYSE: DNR) by buying about 74,000 acres in the promising Tuscaloosa Marine shale area. It also has a piece of the Eagle Ford shale area, although concerns about serious drought in the west Texas region could limit drilling activity if it persists.

The best outcome for shareholders might be for a takeover bid. Goodrich shares jumped when BHP Billiton (NYSE: BHP) bought out rival Petrohawk Energy earlier this year. But the stock has since pulled back, leaving investors wondering whether the stock has any chance of getting much closer to perfection on its own. Without some major improvements -- including a healthy recovery in natural gas prices -- the answer looks like no, at least for the foreseeable future.

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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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 ."

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.