Has Thompson Creek Metals 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 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.

Factor

What We Want to See

Actual

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.

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 the best investments from the rest.

If you like miners with lucrative opportunities, we've got a gold stock 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 Thompson Creek Metals 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.


Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 10, 2012, at 12:06 PM, techpatriot wrote:

    Have these Motley Fool Articles become the Perfect Spam Vehicle?

    That was meant to be a tongue in cheek (funny) comment about the article, not the author Dan, so please do not take any offense. But this is a formulaic MF type of article that is designed to get people interested in the MF service, and TC, right now, as an investment does not fit neatly into this particular formulaic category. I'm already a MF subscriber, and what made me interested in the services was not articles like this, but thoughtful, well thought out analysis like this one:

    http://www.fool.com/investing/general/2012/05/11/crunching-t...

    Frankly, I am not worried about growth, margins or dividends with TC, as it is in the midst of completely reinventing itself as a company. It is a long term play, and it is diversifying itself admirably.

    Moly is tied to steel, which is tied to construction and energy pipelines etc. The US will eventually rebound, and Moly will be okay. China and India, Indonesia and Brazil may slow down, but they won't stop growing. The politico-economic dynamics of this metal put a long term floor under this quasi rare earth.

    Copper is more heavily tied to the world economy, and if there is a continuing global recession, copper prices will continue to suffer. At some point, they too will come back though.

    Gold will be going up long term if there is a recession, and if there is not a recession it will still continue to be an inflationary hedge for millions. I expect gold to do well no matter what the foreseeable global economic outlook.

    In the next 12-18 months, TC will go from a one trick pony to a very diversified (and very profitable) multi-metals play. But right now, it is priced as if it is just a Moly producer with no other projects, that had a terrible quarter, for no good reason.

    I am buying more now. If the price happens to slip below 3, or even two and a half, I will gladly continue to buy more, thanking my luck that I can afford even more....

    If you are a long term investor, you will be sitting on a gold mine in 18 months. (Literally, an actual goldmine lol). The risks now in this stock are more biased towards it's upside potential rather than it's downside liability at this point. When dollars go on sale for a quarter, you buy them. That's how you make money in sideways markets. That is why it might be "the perfect stock", not because of current metrics.

  • Report this Comment On July 10, 2012, at 2:44 PM, TMFGalagan wrote:

    @techpatriot -

    Thanks for your comment. You'll notice that although I include the table of metrics, the fundamental analysis following the table doesn't rely entirely on those metrics. Rather, I use insight from articles like the Chris Barker article you mention as a way to introduce the company to those who don't know it as well, while also providing links to those articles for those who want to dig deeper.

    best,

    dan (TMF Galagan)

  • Report this Comment On July 11, 2012, at 11:04 AM, techpatriot wrote:

    Yes, I did notice :-)

    My main premise was this was not a good formula for an article on this stock, but I knew you already got that from your last couple of paragraphs. So why even use it? I know, time pressures and output requirements most likely, but still, TMF organization should know as well as any that sometimes less = more.

    One comment at the bottom I disagree with:

    "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."

    Yes, that will propel the stock in the short term, but if the price goes up, that will actually make it less of a perfect stock, yes? A perfect stock is one that you can buy on sale, and hold patiently with little downside risk until it's true valuation can be realized. I would submit that right now, under that criteria, TC is already the perfect stock.

    If conditions improve, then you will pay more to take part in the stock's future price appreciation that is coming inevitably on the heels of enormously increased earnings in 2014 and beyond.

    I suppose you could argue that some price appreciation in the stock now would make it less likely that a larger company might try a takeover of TC, which could be a real possibility at these rock bottom prices.

    Not sure how that scenario would play out, but it would definitely cut out some of the future stock appreciation of the current shareholders by a significant amount. I think if the global economy was healthier, we might have already seen an attempt to do so. Nearly all the miners are in the same boat right now, and those without projects currently underway are mainly trying to conserve capital until commodity demand resumes.

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