Is Stillwater Mining 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 Stillwater Mining (NYSE: SWC  ) 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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 Stillwater.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.8% Fail
  1-Year Revenue Growth > 12% 8.1% Fail
Margins Gross Margin > 35% 27.7% Fail
  Net Margin > 15% 5.4% Fail
Balance Sheet Debt to Equity < 50% 40% Pass
  Current Ratio > 1.3 7.39 Pass
Opportunities Return on Equity > 15% 6% Fail
Valuation Normalized P/E < 20 90.45 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

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

With just two points, Stillwater doesn't look like it's anywhere close to the perfect stock. But the miner has a rare market almost to itself, and coming off some strategic moves from within the company, Stillwater is looking to cement its leadership role in its niche market.

Stillwater has the only platinum and palladium mine in the U.S., and those metals have brought even bigger price moves this year than the headline-making gold market. Palladium in particular is up more than 80%, and platinum has risen around $250 per ounce this year. That has lit a fire under Stillwater's earnings, which are projected to rise to $0.54 per share this year compared with a year-ago loss. Moreover, future growth could be even faster: Analysts expect $1.38 per share in earnings for 2011.

Until recently, Stillwater was majority-controlled by Russian mining company Norilsk Nickel. But Norilsk sold off its shares in a public offering at $19.50 per share. That temporarily depressed prices, but the stock now trades above that level.

Now, Stillwater is looking to expand. It recently bought a Canadian company with substantial reserves in platinum group metals, potentially increasing its production by 40% and challenging competitor North American Palladium (AMEX: PAL  ) on its own turf.

Stillwater's best prospects likely come from investment demand in platinum and palladium. Montana's congressional delegation is pushing the U.S. Mint to produce palladium bullion coins. And with the exchange-traded ETFS Physical Platinum (NYSE: PPLT  ) and ETFS Physical Palladium (NYSE: PALL  ) each with about $600 million in platinum and palladium, it's clear the demand is there.

With platinum-group metals only recently rising dramatically in price, Stillwater's past financials look horrible. But if platinum and palladium keep on their upward track, then Stillwater will look a lot more like the perfect stock in the years ahead.

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 the best investments from the rest.

Click here to add Stillwater Mining 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. 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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