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 Silvercorp Metals (NYSE: SVM ) 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 Silvercorp Metals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||113.7%||Pass|
|1-Year Revenue Growth > 12%||65.1%||Pass|
|Margins||Gross Margin > 35%||80.4%||Pass|
|Net Margin > 15%||40.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||7.33||Pass|
|Opportunities||Return on Equity > 15%||28.2%||Pass|
|Valuation||Normalized P/E < 20||17.10||Pass|
|Dividends||Current Yield > 2%||1.0%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||8 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Silvercorp just started paying a dividend in March 2009. Total score = number of passes.
With 8 points, Silvercorp Metals falls just short of perfection. The silver miner has benefited strongly from the big gains in precious metals prices in recent years, and the big question is where silver goes from here.
Silver bullion has seen a huge run-up in prices in recent years. Although a rise to $50 per ounce proved short-lived, the ensuing correction appears to have run its course, and silver has started moving higher again. Yet several miners, including Hecla Mining (NYSE: HL ) and Pan American Silver (Nasdaq: PAAS ) , remain well below their peaks from earlier this year.
Silvercorp stands out from the crowd because of its low production costs. Unlike smaller companies such as Great Panther Silver (AMEX: GPL ) and Endeavour Silver (NYSE: EXK ) , Silvercorp actually boasts negative cash production costs once you factor in the value of incidental gold and base metals obtained during the silver-mining process. That means every ounce Silvercorp mines is pure profit.
Just last week, Silvercorp had to deal with allegations of fraud. Because of the company's four silver mines in China, the company is apparently getting painted with the same brushstroke that has hit China-based small-cap stocks throughout much of 2011. Silvercorp has vigorously denied the allegations, and those who've been waiting for a chance to get into the company cheap might appreciate the stock's decline.
In the long run, Silvercorp should thrive if silver prices stay at their current lofty levels. If silver keeps racing higher, then it might not be too long before Silvercorp finally reaches 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.