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 Range Resources (NYSE: RRC) 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 Range Resources.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.1% Fail
  1-Year Revenue Growth > 12% 41.7% Pass
Margins Gross Margin > 35% 83.3% Pass
  Net Margin > 15% (23%) Fail
Balance Sheet Debt to Equity < 50% 76.9% Fail
  Current Ratio > 1.3 0.71 Fail
Opportunities Return on Equity > 15% (11.9%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.3% Fail
  5-Year Dividend Growth > 10% 14.6% Pass
  Total Score   3 out of 9

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

Since we looked at Range Resources last year, the natural gas producer has picked up a point. But the acceleration in revenue growth masks weak conditions in the industry that will continue to be a challenge.

Range Resources has struggled in a terrible environment for natural gas prices. With gas near a decade low, the company hasn't been able to stay profitable, given its relatively high production costs. Just earlier this week, Chesapeake Energy (NYSE: CHK), which also suffers from a high cost structure, announced plans to slash its natural gas production in light of low prices. Other producers have simply shifted away from gas, with SandRidge Energy (NYSE: SD) having increasingly focused on oil and liquids over natural gas.

But the company still has long-term promise. Its move into the Marcellus Shale has given it a competitive advantage there, and so far, its results in the Marcellus have been very promising. But concerns about seismic events that some have tried to tie to hydraulic fracturing pose a potential threat for the entire industry.

For Range Resources to get closer to perfection, it needs to work on getting its costs down. Until it does, lower-cost providers Ultra Petroleum (NYSE: UPL) and Southwestern Energy (NYSE: SWN) will have a huge competitive advantage and be better able to outlast Range Resources in a prolonged natural gas slump. If gas rebounds, however, Range Resources could be among the biggest winners.

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.

Range Resources may not be the best stock out there right now, but we've got some other ideas you should check out. Please accept this invitation to receive the Fool's latest special report absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Range Resources, Ultra Petroleum, and Chesapeake Energy, as well as writing puts in 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.