Is Molycorp the Perfect Stock?

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 Molycorp (NYSE: MCP  ) 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 Molycorp.
 

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 240.8%* Pass
  1-Year Revenue Growth > 12% 594.2% Pass
Margins Gross Margin > 35% 22.6% Fail
  Net Margin > 15% (77.4%) Fail
Balance Sheet Debt to Equity < 50% 0.4% Pass
  Current Ratio > 1.3 13.47 Pass
Opportunities Return on Equity > 15% (12.5%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings. Total score = number of passes. *2.25-year growth rate.

With only four points, Molycorp hasn't dug up particularly rare results. The rare-earth metal miner has gained a lot of attention lately, but so far, it's too early to tell whether the company will deliver on its ambitious promises.

Molycorp was part of Chevron (NYSE: CVX  ) until 2008, when it was put into the hands of private investors. The company went public in July 2010 to initial skepticism, but China's decision to restrict exports of rare-earth metals led to soaring interest in the company.

Now, stocks that have just about anything to do with rare-earth elements have done well. Rare Element Resources (AMEX: REE  ) has seen shares jump sharply in the past year. Even China Shen Zhou Mining (AMEX: SHZ  ) , which doesn't actually mine anything that qualifies as a rare-earth element, has seen plenty of investor interest from investors who refuse to accept even the company's own guidance at face value.

A recent discovery, though, brings Molycorp's entire business model into question. Japanese researchers say that an undersea mother lode of 100 billion metric tons of rare-earth minerals is sitting at the bottom of the Pacific Ocean, waiting to be scooped up. That would especially hurt Rare Element Resources and Avalon Rare Metals (AMEX: AVL  ) , which won't open their mines for years. But it obviously isn't good news for Molycorp, either.

Rare-earth elements are critical components for many popular products, so the quest to find more of them is reasonable. The question is whether Molycorp can act fast enough to cash in before competitors arrive on the scene.

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 Molycorp to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron. 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.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2011, at 3:22 PM, prescient11 wrote:

    Sweet God, is motley fool just populated by complete morons??????????

    read again what you wrote three times and think about why it's stupid. please.

  • Report this Comment On July 12, 2011, at 9:05 PM, SanDiego44 wrote:

    Fools!

    Look at the estimated costs for getting the stuff off the ocean floor and think again.

  • Report this Comment On September 09, 2011, at 3:34 PM, billdick6 wrote:

    If Forbes is correct,(http://www.forbes.com/sites/gordonchang/2011/09/04/china-tra...

    “Hitachi {global supplier of 45% of RE magnets}, if it goes ahead, will be following Showa Denko, which announced in June that it would increase by 50% its output in China of alloys used in magnets for hybrids.

    “Japanese production is moving to China faster than I’ve ever seen in the past,” said Constantine Karayannopoulos, the chief executive of a company in the industry. “We may be witnessing a fundamental restructuring of the global rare earth supply chain.” … For lower production costs and assured asscess to REs.

    China knows how to play hard ball. – As they did with the REs some year ago – they will soon undercut the price of RE magnets too (and gain more jobs in China by making them for all the world).

    Who will be needing MolyCorp’s REs when they can buy the RE magnets, etc. cheaper from China?

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