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 Pan American Silver (Nasdaq: PAAS ) 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 Pan American Silver.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||27.3%||Pass|
|1-Year Revenue Growth > 12%||35.3%||Pass|
|Margins||Gross Margin > 35%||57.5%||Pass|
|Net Margin > 15%||41.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||2.0%||Pass|
|Current Ratio > 1.3||4.22||Pass|
|Opportunities||Return on Equity > 15%||22.6%||Pass|
|Valuation||Normalized P/E < 20||7.76||Pass|
|Dividends||Current Yield > 2%||0.7%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||8 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Pan American started paying a dividend in 2010. Total score = number of passes.
Since we looked at Pan American Silver last year, the stock has picked up a couple points. A huge drop in price, continuing revenue growth, and better returns on equity have made the silver miner look a lot more attractive.
Gold gets most of the attention among precious metals, but silver has made an equally impressive bull run over the past decade. Pan American has taken maximum advantage of those favorable conditions, with huge increases in revenue and profits for the miner last year. Although it has to share some of those profits with Silver Wheaton (NYSE: SLW ) , which has a silver-streaming agreement with Pan American, the miner has made out well in the silver boom.
Yet Pan American isn't standing still. It's buying fellow miner Minefinders (AMEX: MFN ) for about $1.5 billion, which will substantially boost its silver production and add some gold to the mix. Moreover, Pan American has had an interesting relationship with Fortuna Silver (NYSE: FSM ) , as the companies have made claims around each other's properties as recognition of their joint abilities to find lucrative opportunities.
One challenge Pan American faces is that an Argentine provincial government ban on open-pit mining has stymied its Navidad mine project. Given Navidad's massive estimated reserves, any favorable resolution to the issue could immediately vault the stock higher.
To keep improving its score, Pan American needs only to pay a more meaningful dividend. Rival Hecla (NYSE: HL ) linked its payout to silver prices recently, and such a move could help earn Pan American those last two points. In the meantime, I'm making a positive CAPScall on Pan American and think that it could reach perfection in the near future.
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to sift out the best investments.
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