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 Thompson Creek Metals (NYSE: TC ) 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 Thompson Creek Metals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.6%||Fail|
|1-Year Revenue Growth > 12%||(14.5%)||Fail|
|Margins||Gross Margin > 35%||29.7%||Fail|
|Net Margin > 15%||28.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||21.2%||Pass|
|Current Ratio > 1.3||1.48||Pass|
|Opportunities||Return on Equity > 15%||9.8%||Fail|
|Valuation||Normalized P/E < 20||6.11||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Thompson Creek Metals last year, the company's score has plunged by four points. Falling revenue and declining margins explain most of the damage, which has led to the stock having lost about two-thirds of its value in the past year as it aims to make a huge strategic shift.
Until recently, Thompson focused on producing molybdenum, a base metal that's used to produce a steel alloy that better resists corrosion. Yet its acquisition of gold and copper miner Terrane Metals two years ago sent the company in a new direction, taking away what had been the only molybdenum pure play and giving it broader exposure to the metals markets.
Over the past year, though, a bunch of headwinds have hit the industry. Mine construction projects like Thompson's Mt. Milligan site have seen start-up costs skyrocket. Barrick Gold (NYSE: ABX ) had costs for its majority-owned Cerro Casale mine triple, while Teck Resources (NYSE: TCK ) and NovaGold Resources' (NYSE: NG ) Galore Creek joint venture has suffered from projected costs expected almost to quintuple.
As a result, Thompson has had to resort to more financing through a second sale of gold royalty streams to Royal Gold (Nasdaq: RGLD ) . As long as the Mt. Milligan mine's prospects pan out as well as many expect, there should still be a long-term payoff for patient investors, albeit not quite as large as it would have been without higher costs.
What Thompson needs to improve are better conditions in the steel industry as well as a return to the conditions that pushed gold and copper prices higher. With that, Thompson could be back up near perfection very quickly.
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 the best investments from the rest.
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