Is Yamana Gold the Perfect Stock?

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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 if Yamana Gold (NYSE: AUY  ) 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.

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 Yamana Gold.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 111.1% pass
  1-Year Revenue Growth > 12% 88.3% pass
Margins Gross Margin > 35% 61.3% pass
  Net Margin > 15% 18.7% pass
Balance Sheet Debt to Equity < 50% 7.2% pass
  Current Ratio > 1.3 2.21 pass
Opportunities Return on Equity > 15% 3.9% fail
Valuation Normalized P/E < 20 31.56 fail
Dividends Current Yield > 2% 0.7% fail
  5-Year Dividend Growth > 10% 18.9%* pass
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. * 4-year growth rate based on most recent quarterly dividend. Total score = number of passes.

Yamana's score of 7 reflects both the strength of precious metals generally as well as particular things the company is doing right. On one hand, gold prices at record highs have helped the entire mining industry, whose profits rely on margins between miners' production costs and sales prices.

Where Yamana shines above its competitors, though, is in its rock-bottom production costs. At just over $100 per gold-equivalent ounce, Yamana easily eclipses the costs of larger miner Barrick Gold (NYSE: ABX  ) , which itself clocked in above fellow majors Newmont Mining (NYSE: NEM  ) and Goldcorp (NYSE: GG  ) .

Moreover, Yamana's recent growth has been astoundingly strong, thanks in part to its exposure to a wide variety of metals, including silver, copper, molybdenum, and zinc. As the entire metals group gains in stature, Yamana is poised to capitalize on several fronts. And despite relatively high valuations and a typically low return on equity for this capital-intensive industry, Yamana looks a lot closer to perfect than many stocks out there. While some investors have simply made direct bets on bullion prices via ETFs SPDR Gold (NYSE: GLD  ) and iShares Comex Gold Trust (NYSE: IAU  ) , well positioned miners may provide a superior way to invest in the yellow metal.

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.

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 (3) | Recommend This Article (15)

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 October 11, 2010, at 4:00 PM, MellowGuy1 wrote:

    The ROE and P/E ratios aren't as good as I would like, but a rapidly growing corporation will have high depreciation expenses (partly accelerated) which hides some earnings from income statement.

    Dividends only make sense when a stock is selling below book and even then, it might be better if they bought back their stock.

  • Report this Comment On October 11, 2010, at 7:29 PM, rockiedog07 wrote:

    Why is it that Yamana looks so good against their peers. It sits between the range of 9-11 with one break out of 14 last year? My guess is that it's still priced down before the real profit starts in probably 2012.

  • Report this Comment On October 12, 2010, at 2:21 PM, aputtman wrote:

    I think the ROE, yield and P/E are better than most of the gold miners. You just won't get a high yield from a miner. There are other stocks for high yields.

    Fine report, thanks for the info.

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