Is Denison Mines 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 Denison Mines (AMEX: DNN  ) 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 Denison Mines.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 60.8% Pass
  1-Year Revenue Growth > 12% (24.6%) Fail
Margins Gross Margin > 35% (6.6%) Fail
  Net Margin > 15% (73.2%) Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 9.28 Pass
Opportunities Return on Equity > 15% (15.3%) 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.

With only three points, Denison Mines hasn't hit the mother lode on our scale. The miner finds itself in a now-questioned industry, but the ongoing demand for nuclear power should help its stock recover in time.

Historically, Denison Mines has explored for and mined uranium in the U.S. and Canada. In addition to uranium properties in the desert Southwest and the Canadian province of Saskatchewan, Denison also has interests in properties in Africa and Asia.

Uranium was a fast-growing commodity until last year's Japanese nuclear reactor accident following the earthquake and tsunami that hit the island nation. Since then, uranium prices have plunged, and NRG Energy's (NYSE: NRG  ) decision last year to give up on its South Texas Nuclear Development Project seemed to start a trend away from nuclear power, hurting potential uranium demand.

The companies that produce uranium have seen their stocks follow suit. Industry giant Cameco (NYSE: CCJ  ) had contracts in place before the disaster to sell some of its supplies, which helped cushion the blow somewhat. But smaller players Uranium Energy (AMEX: UEC  ) and Uranerz Energy (AMEX: URZ  ) are suffering particularly hard in light of Germany's decision to phase out nuclear energy entirely in the next decade.

More recently, news that the U.S. Nuclear Regulatory Commission approved a new nuclear reactor for the first time in three decades has renewed hope for uranium. But, as long as natural gas prices remain low, the incentives to move to nuclear power don't seem to outweigh the risks involved.

That may be why Denison sold its U.S. assets to Energy Fuels earlier this month. The sale has many looking for a takeover of the company, which could be the best outcome for what has thus far failed to become a perfect stock.

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.

If you like mining stocks, we've got one you really should look at more closely. Read the Motley Fool's latest special report on gold to discover the tiny gold stock digging up massive profits. It's free but only available for a limited time.

Click here to add Denison Mines 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. 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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