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 Kodiak Oil & Gas (NYSE: KOG) 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 Kodiak Oil & Gas.


What We Want to See


Pass or Fail?

Growth Five-year annual revenue growth > 15% 107.7% Pass
  One-year revenue growth > 12% 383.3% Pass
Margins Gross margin > 35% 77.7% Pass
  Net margin > 15% 6.9% Fail
Balance Sheet Debt to equity < 50% 72.7% Fail
  Current ratio > 1.3 0.68 Fail
Opportunities Return on equity > 15% 2.2% Fail
Valuation Normalized P/E < 20 173.85 Fail
Dividends Current yield > 2% 0% Fail
  Five-year dividend growth > 10%                     0% Fail
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Kodiak Oil & Gas last year, the company has dropped two points. Despite seeing even faster growth and becoming profitable, the company's balance sheet has been ravaged with an increase in debt, although the shares are still up about 25% over the past year.

Kodiak was one of the early players in the Bakken shale area, which is still producing big profits for companies of all sizes. Whiting Petroleum (NYSE: WLL) has seen substantial production gains in the region in the past year, while Kodiak has increased its acreage in the broader Williston Basin with asset purchases. Many other small players are still waiting for their big payoffs, as Samson Oil & Gas (AMEX: SSN) has yet to see significant production from its Bakken holdings.

But several factors have held Kodiak's earnings back. Depreciation costs from acquisitions hurt net income in the most recent quarter. Also, like Continental Resources (NYSE: CLR), Kodiak had a lot of unrealized losses from hedging strategies. Given the recent drop in oil prices, those hedges could turn into additional gains for Kodiak and Continental during the current quarter.

Kodiak has long been seen as a potential takeover target. So far, though, Kodiak has eluded the reach of larger companies, despite its desirable mix of oil and natural-gas liquids. With the much larger Chesapeake Energy (NYSE: CHK) trying to shed assets rather than get bigger, Kodiak may well stay independent longer than many have thought in the past.

For Kodiak to improve, it needs to keep itself from falling into a big debt trap. Although financing is important to bolster production, high energy prices should help it avoid getting in too far over its head. As long as energy stays strong, Kodiak will have the potential to get a lot closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

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