Has Mesabi Trust 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 Mesabi Trust (NYSE: MSB  ) 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 Mesabi Trust.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.9% Fail
  1-Year Revenue Growth > 12% 9.3% Fail
Margins Gross Margin > 35% 100% Pass
  Net Margin > 15% 97.0% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 4.29 Pass
Opportunities Return on Equity > 15% 966.2% Pass
Valuation Normalized P/E < 20 15.44 Pass
Dividends Current Yield > 2% 10.3%* Pass
  5-Year Dividend Growth > 10% 13.6% Pass
       
  Total Score   8 out of 10

Source: S&P Capital IQ. Total score = number of passes. * Based on trailing-12-month dividend payments.

Since we looked at Mesabi Trust last year, the company has added a point. Dividend growth climbed above the 10% mark, but the stock has fallen 20% as some investors don't seem to understand exactly how Mesabi works.

As a royalty trust, Mesabi owns iron ore producing properties that a subsidiary of Cliffs Natural Resources (NYSE: CLF  ) is responsible for mining and selling. Mesabi then gets a cut, which goes out to shareholders every quarter as dividend distributions.

As happens every year, Mesabi's quarterly payout plunged during the winter, as shipping came to a standstill. But like clockwork, the distribution has always gone back up in the subsequent quarter, and often, shares rise in response.

But another confusing thing may have led to declines for Mesabi. Great Northern Iron Ore (NYSE: GNI  ) , which is also set up as a trust, saw its shares plunge by more than half since March as investors finally started to realize that its 2015 termination date would leave investors with nothing in just three years. But Mesabi Trust isn't set up with a fixed termination date, meaning that any concerns of a similar end for Mesabi are unwarranted.

More important are challenges presented by a slowdown in economic activity. Just as Rio Tinto (NYSE: RIO  ) and Vale (NYSE: VALE  ) have gotten hit by the potential for a Chinese slowdown in iron ore demand, so too could the prices Mesabi receives for its royalties go down. For now, though, Mesabi continues to offer good value to investors, and a rebound in demand could give it the growth it would need to achieve 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.

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Click here to add Mesabi Trust 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 in this article. 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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  • Report this Comment On June 08, 2012, at 4:05 PM, GOLDOIL wrote:

    Excellent analysis...I will research MSB.

    RE: GNI, This is a clear play for an investor who wants a cash cow with over 23% per year.Only caution would be to Sell with hard Stop Loss by

    mid 2014 since stock will stop trading in 2015.

    Contrary to the news (which some wall street analyst shorted like crazy before releasing the news out of the blue and torpedo a drop from 129 to 94 and then again 94 to 61) the stock will have a terminal value of about $ 8.50 per share. If the stock is at $6 in 2015, it may be a quick 40% gain.

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