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 Mesabi Trust (NYSE: MSB ) 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 Mesabi Trust.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.7%||Fail|
|1-Year Revenue Growth > 12%||83.8%||Pass|
|Margins||Gross Margin > 35%||100.0%||Pass|
|Net Margin > 15%||97.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||5.35||Pass|
|Opportunities||Return on Equity > 15%||801.8%||Pass|
|Valuation||Normalized P/E < 20||20.83||Fail|
|Dividends||Current Yield > 2%||7.9%||Pass|
|5-Year Dividend Growth > 10%||9.9%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Mesabi Trust earns a score of 7 and falls just short on a couple of metrics. The trust produces a hot commodity, but some misunderstandings about the lumpy nature of the company's dividend makes it more volatile than it might otherwise be.
Mesabi is a royalty trust with substantial iron ore holdings. Cliffs Natural Resources (NYSE: CLF ) subsidiary Northshore Mining mines the ore, but shareholders get a royalty interest in the form of quarterly distributions.
For its most recent quarter, the company dropped its dividend to just $0.05, which would imply a yield of only 0.7%. Yet the problem was due to seasonality. The company's first-quarter dividend is always on the low side, and this year, bad weather kept shippers from moving as much ore as normal through the Great Lakes.
Unlike Great Northern Iron Ore (NYSE: GNI ) , a similar high-yielding iron ore royalty trust that is set to dissolve in 2015 and transfer its assets to ConocoPhillips (NYSE: COP ) , Mesabi doesn't have a fixed termination date and will not cease to exist within the next 21 years at least.
Certainly, commodity-related stocks like Mesabi have plenty of risk. But investors will now find Mesabi shares down more than a third since March. If you think that global expansion will keep demand for iron ore high, then Mesabi could be poised for a big bounce.
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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