Has Golden Star Resources 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 Golden Star Resources (AMEX: GSS  ) 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 Golden Star Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 31.4% Pass
  1-Year Revenue Growth > 12% 2.9% Fail
Margins Gross Margin > 35% 8.0% Fail
  Net Margin > 15% (4.1%) Fail
Balance Sheet Debt to Equity < 50% 32.7% Pass
  Current Ratio > 1.3 2.03 Pass
Opportunities Return on Equity > 15% (3.9%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Golden Star Resources last year, the miner has lost a point. Slowing revenue growth has taken its toll on the stock, with shares down sharply over the past year.

The World Gold Council, which has promoted gold and its many uses, marks its 25th anniversary in 2012. Along with fellow members Primero Mining (NYSE: PPP  ) and Kinross Gold (NYSE: KGC  ) , Golden Star's membership makes it part of a group that represents about 60% of gold production and more than $80 billion in annual revenues.

But even though miners generally underperformed the price of gold in 2011, Golden Star was a particularly bad disappointment for investors. The company has seen subpar production results, having to cut its estimates for both its Bogoso/Prestea and Wassa mines last September. Although the company hopes that its Pampe mine may help return it to favor, shareholders don't seem convinced.

What Golden Star has going for it is a bargain price. While shares of huge miners Newmont Mining (NYSE: NEM  ) and Barrick Gold (NYSE: ABX  ) go for more than twice book value, Golden Star weighs in at only a 25% premium to book value -- cheap by comparison. Of course, that may reflect some concern about the reliability of Golden Star's book value, but if the figures are accurate, they show the value the stock offers now.

To reach perfection, Golden Star needs to take advantage of the high gold price environment and get moving on higher production. Otherwise, investors could easily lose confidence in this gold play, especially with so many other attractive gold options available.

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.

Gold investors need to be aware of another opportunity that could have even more potential than Golden Star. Read the Motley Fool's latest special report on gold to find out the tiny gold stock digging up massive profits. It's free but only available for a limited time.

Click here to add Golden Star Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Primero Mining. 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.


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