Has Silver Wheaton Become 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 Silver Wheaton (NYSE: SLW  ) 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 Silver Wheaton.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 40.5% Pass
  1-Year Revenue Growth > 12% 74.5% Pass
Margins Gross Margin > 35% 86.1% Pass
  Net Margin > 15% 83.1% Pass
Balance Sheet Debt to Equity < 50% 3.8% Pass
  Current Ratio > 1.3 4.21 Pass
Opportunities Return on Equity > 15% 23.0% Pass
Valuation Normalized P/E < 20 55.60 Fail
Dividends Current Yield > 2% 0.3% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   7 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Silver Wheaton started paying a dividend in March 2011. Total score = number of passes.

When we looked at Silver Wheaton last year, it had a score of 6, so the company has gotten a point closer to perfection. Gains in returns on equity earned Silver Wheaton the extra point, but the even better news for shareholders has been the company's decision to start paying a modest dividend.

Both silver bullion and the miners who dig it up have seen a volatile though largely profitable year. This time last year, silver prices had just moved above $20. Since then, the white metal pushed as high as $50 before falling back, making shareholders of iShares Silver Trust (NYSE: SLV  ) and the leveraged ProShares Ultra Silver (NYSE: AGQ  ) happy. But then, after a parabolic move upward, silver saw a huge correction, giving short bets like ProShares UltraShort Silver (NYSE: ZSL  ) their day in the sun.

All that action hasn't changed the fact that Silver Wheaton remains a unique way to benefit from high silver prices. Its streaming model gives it fixed prices of about $4 per ounce, so with current prices almost 10 times as much as that cost, it's no wonder that returns on equity have increased.

Best of all, mining companies are starting to catch the dividend bug. Like Eldorado Gold (NYSE: EGO  ) and Hecla Mining (NYSE: HL  ) , Silver Wheaton initiated a dividend payout earlier this year. It's small right now, but if prices stay high, then there's every reason to think it could rise in the future.

Silver Wheaton hasn't reached perfection just yet. But the stock has made progress, and if silver cooperates, then a perfect 10 isn't so far away.

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.

Add Silver Wheaton 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. We Fools don't 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 (8)

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  • Report this Comment On September 22, 2011, at 5:21 PM, wrightdda wrote:

    agreed, and at 35, it's a great long term hold, even if SLV hits 30....

  • Report this Comment On September 23, 2011, at 8:38 AM, catoismymotor wrote:

    At 8:33 EST this morning it is down another 4%. Oh, I wish I had the dough to buy more shares! I'll just have to stay content with holding on.

  • Report this Comment On September 23, 2011, at 9:11 AM, catoismymotor wrote:

    @ 8:54 is is down 5.5%.

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