Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Newmont Mining (NYSE: NEM ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Newmont Mining.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||17.5%||Pass|
|1-Year Revenue Growth > 12%||23.8%||Pass|
|Margins||Gross Margin > 35%||62.8%||Pass|
|Net Margin > 15%||23.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||28.3%||Pass|
|Current Ratio > 1.3||2.64||Pass|
|Opportunities||Return on Equity > 15%||22.2%||Pass|
|Valuation||Normalized P/E < 20||10.33||Pass|
|Dividends||Current Yield > 2%||1.2%||Fail|
|5-Year Dividend Growth > 10%||4.6%||Fail|
|Total Score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Newmont Mining shines brightly with its score of 8. The gold miner is a giant in its industry, and the popularity of the yellow metal in recent years has done wonders for Newmont's financials.
A decade ago, with gold prices languishing, Newmont didn't look nearly this attractive. Shares cost about a third what they do now, and many seemed to believe that gold was dead as an investment.
Now, though, everything's going right for Newmont. The rise in gold's popularity from ETFs SPDR Gold Trust (NYSE: GLD ) and iShares Gold (NYSE: IAU ) has added huge investment demand to the industry. Although the company made a gamble in removing its forward-selling hedges back in 2007, the move has proved to be a winner and has greatly enhanced Newmont's profitability, especially compared to rivals Barrick Gold (NYSE: ABX ) and AngloGold Ashanti (NYSE: AU ) , which maintained their hedges until last year.
The demand is fierce enough that miners are feverishly looking to increase their size through acquisitions. Last month, Newmont announced plans to buy out Fronteer Gold (AMEX: FRG ) in a $2.3 billion all-cash deal.
The big question is whether gold will continue rising or come crashing down. But as long as gold prices stay high, Newmont should remain in a good position to give shareholders exactly what they want.
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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