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 Yamana Gold (NYSE: AUY ) 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 Yamana Gold.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||88.2%||Pass|
|1-Year Revenue Growth > 12%||42.5%||Pass|
|Margins||Gross Margin > 35%||65.7%||Pass|
|Net Margin > 15%||29.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||6.3%||Pass|
|Current Ratio > 1.3||2.75||Pass|
|Opportunities||Return on Equity > 15%||8.3%||Fail|
|Valuation||Normalized P/E < 20||21.17||Fail|
|Dividends||Current Yield > 2%||1.2%||Fail|
|5-Year Dividend Growth > 10%||35.1%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
When we looked at Yamana Gold last year, it had an identical score of 7. But earnings have risen significantly, bringing down the company's P/E ratio, and better returns on equity and stronger dividends have also improved those figures.
Despite a recent drop, gold prices have risen sharply since last year. Yamana in particular has cashed in because it has rock-bottom net cash costs for gold production after factoring in proceeds from mining byproducts like copper. That gives it a big competitive advantage over higher-cost providers like Barrick Gold (NYSE: ABX ) , Agnico-Eagle Mines (NYSE: AEM ) , and Kinross Gold (NYSE: KGC ) .
But perhaps the most interesting deal Yamana has done in the past year involved selling part of its Agua Rica mine to a joint venture that includes Goldcorp (NYSE: GG ) . Under the deal, Yamana can receive bonus revenue from gold production from the site, along with its regular ownership interest in the joint venture.
For shareholders, the good news has come in the form of higher dividends. Yamana raised its payout by 50% in May, joining Eldorado Gold (NYSE: EGO ) and Newmont Mining (NYSE: NEM ) with recently enhanced dividends for their investors. With gold prices so high, miners are in the unusual position of having more cash than they absolutely need, making dividends more viable.
Obviously, Yamana's prospects rely on continued strength in gold prices. But even without the spectacular gains of the past 10 years continuing for the yellow metal, Yamana could well stay closer to perfect than many of its peers.
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 Yamana Gold 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."