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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 Southern Copper (NYSE: SCCO ) 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 Southern Copper.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.9%||fail|
|1-Year Revenue Growth > 12%||57%||pass|
|Margins||Gross Margin > 35%||57%||pass|
|Net Margin > 15%||29.8%||pass|
|Balance Sheet||Debt to Equity < 50%||71.3%||fail|
|Current Ratio > 1.3||4.82||pass|
|Opportunities||Return on Equity > 15%||37.8%||pass|
|Valuation||Normalized P/E < 20||30.13||fail|
|Dividends||Current Yield > 2%||1%||fail|
|5-Year Dividend Growth > 10%||14.2%||pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Southern Copper's score of 6 is fairly impressive, even if it falls short of perfect. The miner finds itself in just about the perfect environment.
Gold has gotten the lion's share of attention among the metals, but investors can't complain about the way copper has performed. With an estimated 122 billion pounds of copper reserves, Southern Copper believes it has more copper than any other miner. The company expects to produce about 1.1 billion pounds of the red metal this year. Yet the company can't rest on its laurels, as new projects like Ivanhoe Mines' (NYSE: IVN ) Mongolian copper and gold mine give an idea of how strong the competition is getting as copper prices rise.
Recently, Southern Copper has taken a back seat to Freeport-McMoRan Copper & Gold (NYSE: FCX ) , which has enjoyed a longer period of sustained revenue growth and a slightly healthier balance sheet. But that leaves Southern Copper a lot more room to grow, as analysts expect a future growth rate of more than triple Freeport's.
For Newmont Mining (NYSE: NEM ) and other gold-centered miners, copper is likely to remain an afterthought. But if you think copper's prospects outshine those of precious metals, Southern Copper is a good way to gain exposure to the hot commodity.
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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