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 Goldcorp (NYSE: GG ) 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 Goldcorp.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||24.5%||Pass|
|1-Year Revenue Growth > 12%||29.7%||Pass|
|Margins||Gross Margin > 35%||60.9%||Pass|
|Net Margin > 15%||31.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||3.4%||Pass|
|Current Ratio > 1.3||3.12||Pass|
|Opportunities||Return on Equity > 15%||8.2%||Fail|
|Valuation||Normalized P/E < 20||17.86||Pass|
|Dividends||Current Yield > 2%||1.7%||Fail|
|5-Year Dividend Growth > 10%||20.4%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Goldcorp last year, the company has picked up a couple points. A big increase in its dividend along with a much more reasonable valuation after its recent stock-price drop combined to give the miner a higher score.
Goldcorp is a major producer of gold and other metals, with substantial mining properties scattered throughout the Western Hemisphere. For years, the company has taken advantage of rising gold prices to create booming profits, with an emphasis on low-cost production that puts it in the same class as Yamana Gold (NYSE: AUY ) and other cost-minimizing miners. Goldcorp also mines enough by-product silver from its Penasquito mine to give silver streamer Silver Wheaton (NYSE: SLW ) its cut and still have enough left over to reduce its net costs substantially.
The company has seen some setbacks recently. Last year, floods in the Dominican Republic forced Goldcorp and joint-venture partner Barrick Gold (NYSE: ABX ) to push back production at its Pueblo Viejo mine until the middle of this year. So far, this year's up-and-down environment for gold prices has also made many investors step back from Goldcorp and its mining peers.
But overall, the company is continuing its growth trajectory. Even as rival Kinross Gold (NYSE: KGC ) looks to slow its growth in the face of rising costs, Goldcorp expects keep expanding, with a goal of increasing output by 70% by 2016.
The higher dividend yield and return on equity that Goldcorp needs in order to reach perfection aren't far beyond the company's grasp. If gold prices stay high a little longer, then Goldcorp could get those final two points in the near future.
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.
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