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 Vale (NYSE: VALE ) 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 Vale.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||21.6%||Pass|
|1-Year Revenue Growth > 12%||94.4%||Pass|
|Margins||Gross Margin > 35%||61%||Pass|
|Net Margin > 15%||41.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||34%||Pass|
|Current Ratio > 1.3||2.12||Pass|
|Opportunities||Return on Equity > 15%||33.2%||Pass|
|Valuation||Normalized P/E < 20||7.90||Pass|
|Dividends||Current Yield > 2%||2.8%||Pass|
|5-Year Dividend Growth > 10%||5.6%||Fail|
|Total Score||9 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With nine points, Vale falls just short of perfection. The mining giant is a big part of what has brought Brazil to the forefront of the emerging-market scene.
Together with BHP Billiton (NYSE: BHP ) and Rio Tinto (NYSE: RIO ) , Vale is part of an oligopoly controlling a huge portion of the world's production of iron ore, which is a key component in steel production. China has served as a huge market for all three of these companies, and Vale has definitely benefited from China's rapid growth in recent years.
But with commodities of all sorts seeing prices soar, Vale hasn't been content to stick solely with iron ore. Last year, the company launched a tender offer to buy a copper refining and processing company that would help it treat the copper that Vale mines, which has a significant amount of contaminants.Vale won't reach the scale of copper giant Freeport-McMoRan Copper & Gold (NYSE: FCX ) with this venture, but it will greatly diversify its natural resource portfolio.
Lately, though, the company has gone through some political intrigue. With the election of President Dilma Rousseff to lead Brazil, a new CEO, Murilo Ferreira, took over for former top executive Roger Agnelli. The new appointment may cause shareholders to take a backseat to national interests, but Vale's huge profits suggest that even that handicap wouldn't necessarily cause a lot of pain.
With China arguably starting to overheat and the health of the global economy in doubt, Vale faces significant risks. But even with such a bright past, Vale looks poised to meet the future with what it takes to reach true perfection.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."