Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether Silver Wheaton (NYSE: SLW) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Silver Wheaton.

Factor

What We Want to See

Actual

Pass or Fail? 

Growth

5-Year Annual Revenue Growth > 15%

48.7%*

Pass

 

1-Year Revenue Growth > 12%

132%

Pass

Margins

Gross Margin > 35%

76.5%

Pass

 

Net Margin > 15%

53.4%

Pass

Balance Sheet

Debt to Equity < 50%

6.6%

Pass

 

Current Ratio > 1.3

1.72

Pass

Opportunities

Return on Equity > 15%

11.6%

Fail

Valuation

Normalized P/E < 20

72.78

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

 

Total Score (No. of passes)

 

6 out of 10

Source: Capital IQ, a division of Standard and Poor's. *As of Dec. 2009.

A score of 6 is pretty good, even if it falls short of perfect. Silver Wheaton is still in a strong growth phase, plowing its profits into new silver streaming deals with partners like Barrick Gold (NYSE: ABX). As long as such opportunities exist, Silver Wheaton probably won't pay dividends, which hurts its score here but probably doesn't bother shareholders one bit.

Although Silver Wheaton's return on equity falls short of our 15% threshold, it compares favorably to silver producer Hecla Mining (NYSE: HL), in part because of its unique business model of providing financing in exchange for rights to production streams rather than mining itself. Strong production from Goldcorp's (NYSE: GG) Penasquito mine has helped push revenues strongly higher. And while multiples to normalized earnings are high, the recent move in silver above $20 per ounce has shares looking less expensive on a forward-looking basis.

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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