Is Great Basin Gold 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 Great Basin Gold (AMEX: GBG  ) 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 Great Basin Gold.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 90.3%* Pass
  1-Year Revenue Growth > 12% 70.8% Pass
Margins Gross Margin > 35% 38.4% Pass
  Net Margin > 15% (10.4%) Fail
Balance Sheet Debt to Equity < 50% 59.9% Fail
  Current Ratio > 1.3 0.78 Fail
Opportunities Return on Equity > 15% (3.8%) 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. 
* Three-year growth rate.

With only three points, Great Basin Gold isn't shining bright just yet. But the company has gone through a very fast growth phase, and with high gold prices, the South African miner has the potential to turn that growth into earnings in the near future.

Great Basin has two primary assets. Its Burnstone mine gives it rights to a huge swath of land in South Africa's Witwatersrand Basin gold producing district, while its Hollister gold project in Nevada includes 27 square miles of property with targeted production of 110,000 gold-equivalent ounces per year. With the Hollister property neighboring land owned by Nevada mining giant Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) , it's not surprising that Great Basin sees an opportunity to pull out more than 900,000 gold-equivalent ounces over the mine's expected eight-year life.

Unfortunately, Great Basin hasn't been able to deliver on its production guidance, and investors have punished the stock as a result. Following its announcement in February of a 20% drop in gold recoverable ounces and production that would fall short of the 100,000-ounce level, shares plunged, and the stock now fetches less than a third of what it did just last September.

The key to Great Basin's growth appears to be South Africa. Fears of possible nationalization of gold mines there have hurt Harmony Gold (NYSE: HMY  ) and Gold Fields (NYSE: GFI  ) , as elections later this year could have a major impact on the issue. Great Basin's Burnstone mine is just getting started with its production, and with an estimated 25-year life, there's a lot at stake.

For Great Basin to improve, it needs to deliver on its production targets and get its cash costs down. With gold prices at high levels, there's no excuse for Great Basin not to become profitable in the near future and start a track toward perfection.

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 Great Basin Gold 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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