Is Freeport-McMoRan 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 if Freeport-McMoRan Copper & Gold (NYSE: FCX  ) 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 Freeport-McMoRan.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 37.8% pass
  1-Year Revenue Growth > 12% 43.9% pass
Margins Gross Margin > 35% 54.7% pass
  Net Margin > 15% 21.2% pass
Balance Sheet Debt to Equity < 50% 41.2% pass
  Current Ratio > 1.3 2.77 pass
Opportunities Return on Equity > 15% 38.4% pass
Valuation Normalized P/E < 20 10.92 pass
Dividends Current Yield > 2% 1.9% fail
  5-Year Dividend Growth > 10% 3.7% fail
       
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Freeport-McMoRan comes pretty close to perfect, scoring 8 out of 10 points and just barely missing on the final two. But that should come as no surprise, given the popularity of commodities lately, especially precious metals.

As its name suggests, Freeport-McMoRan has been riding the wave of investor interest on two separate fronts. As gold has powered ahead to successive record highs, the company's production of 2.6 million ounces of gold in 2009 sparked a huge run-up in the stock. Yet, although copper takes a back seat to precious metals, demand for the industrial metal has pushed copper prices almost to new records. At 4.1 billion pounds of 2009 sales, Freeport makes plenty of money from copper as well.

It's important to remember, though, that mining has traditionally been a cyclical business. Along with peers Newmont Mining (NYSE: NEM  ) and Southern Copper (NYSE: SCCO  ) , Freeport has gone through long periods when its returns on invested capital were far lower than they are now.

In addition, as a large player in the business, Freeport arguably won't see the same level of stock movement as smaller miners. Yamana Gold (NYSE: AUY  ) , for instance, is less than a fifth the size of Freeport and has seen much stronger growth as metals have soared upward. Of course, size can also protect you from catastrophic meltdowns, such as the one that Taseko Mines (AMEX: TGB  ) suffered when the Canadian government rejected its mining permit.

As long as metals prices keep going up, Freeport is one of the best ways to play the trend, with reasonable valuations, a decent dividend, and good financial health. For those who believe gold's bull market is just beginning, Freeport is pretty close to a perfect stock.

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.

Click here to add Freeport-McMoRan 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 in this article. Try any of our Foolish newsletters today, free for 30 days. 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.


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