Is Golden Star Resources 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 Golden Star Resources (AMEX: GSS  ) 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 areas, which 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 Golden Star.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 40.5% Pass
  1-Year Revenue Growth > 12% 26% Pass
Margins Gross Margin > 35% 14.7% Fail
  Net Margin > 15% 6.6% Fail
Balance Sheet Debt to Equity < 50% 25.3% Pass
  Current Ratio > 1.3 2.76 Pass
Opportunities Return on Equity > 15% 6.1% Fail
Valuation Normalized P/E < 20 56.94 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 10

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

Golden Star scores just four points, leaving it short of perfection. Although the junior gold miner has seen huge growth as gold prices have soared, shares are highly valued given that the company hasn't seen big gains in margins or returns on equity.

Golden Star's main gold mines are in the African nation of Ghana. Those two mines produced around 400,000 ounces of gold in 2010, and the company is looking to add as much as 100,000 additional ounces of production by further developing nearby areas.

As a small miner, Golden Star faces different conditions from larger companies. Like junior peers Northgate Minerals (AMEX: NXG  ) and Jaguar Mining (NYSE: JAG  ) , Golden Star has relatively high cash costs of producing gold of around $600 per ounce. With gold still above $1,300, there's plenty of room for profit at that level, and in fact, some investors prefer high-cost producers because they're more leveraged to changes in the price of gold.

In November, the company disappointed investors by reducing its production estimates for 2010 to 370,000 ounces. That brought a big drop in the stock, and a subsequent reduction in December to between 350,000 and 355,000 ounces didn't help matters. Lately, with gold prices on the decline, the shares still haven't recovered.

As an up-and-coming miner, Golden Star isn't yet the perfect stock. But if you believe that gold prices will rebound, then companies like these may return to the upswing. Whether you buy them directly or through the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) , companies like Golden Star could get closer to perfection if the gold market cooperates.

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 Golden Star Resources 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. The Fool owns shares of Northgate Minerals. 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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