Is Silver Wheaton the Perfect Stock?

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.

The Motley Fool is recommending 50 stocks in 50 days for its new "11 O'Clock Stock" series. For more information, click here. Then come back to Fool.com every single weekday at 11 a.m. ET for a brand-new pick!

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2010, at 1:52 PM, BillyTG wrote:

    Dividends? Are you serious? You're grading SLW on dividends? Dividends don't make a company "perfect." There are a lot of ways to use profits to better a company, and dividends could be the best or worst, situation-dependent.

  • Report this Comment On September 21, 2010, at 4:15 PM, TMFGalagan wrote:

    @BillyTG -

    That's why I put this line in the article: "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."

    best,

    dan (TMF Galagan)

  • Report this Comment On September 21, 2010, at 5:00 PM, BillyTG wrote:

    Dan, it just bothers me that all the factors have equal weight and that some factors aren't even relevant while some relevant factors aren't even mentioned.

    Clearly dividends are not important here...if anything, SLW should be graded a "0" in the dividends category if they had one---That would be bothersome. Not having a dividend in their situation should be a +1 on your scale. You mention "tangible proof of profits." Well, we're talking about silver here. A bar of silver is WAYYY more tangible proof of value than the fed's fiat money, and it's only becoming moreso. The reason people are buying companies like SLW is because they don't want dollars! The thought of SLW paying out dividends in dollars, while their silver production continues to increase in relative value is just absurd.

    Meanwhile, there are gigantic reasons for owning that are not even mentioned. SLW isn't selling cupcakes, and shouldn't be analyzed the same way as Coca Cola or Oakley sunglasses. This is a precious metals play based on failing world economies.

    As Peter Schiff said this week "Given the state of the US and global economy, I believe it is more important than ever for investors to own gold and silver as a portion of their portfolios. Inflation, depression, and sovereign default are all possible scenarios I see on the horizon. I believe that precious metals will perform better the darker the economic storm-clouds become."

  • Report this Comment On September 21, 2010, at 7:21 PM, Aquagaliente wrote:

    My guess is that SLW is in for slower business (read fewer contracts) the coming years. The silver mining companies is making money these days and which of them would make a contract with SLW and getting paid 5-8-10 USD per ounce, when they can sell in the open market for 20 USD per ounce and more.

    With the rising prices of silver it might even be a good idea if the mining companies buy back their contracts with SLW.

    Just my small coments to the article.

  • Report this Comment On September 22, 2010, at 10:01 AM, daniel1952 wrote:

    I thought SLW purchases the "future" silver from gold,copper mining companies not silver companies. Silver is a byproduct of the mining process. The money SLW advances for this "future" silver can be used by the mining company to offset production costs of mining the

    principle metal. So its a win-win proposition.

  • Report this Comment On July 05, 2011, at 9:44 PM, SN3165 wrote:

    "...Silver Wheaton probably won't pay dividends."

    Better update this article... :-)

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