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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 Molycorp (NYSE: MCP ) 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 Molycorp.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||339.6%*||Pass|
|1-year revenue growth > 12%||679.2%||Pass|
|Margins||Gross margin > 35%||55.1%||Pass|
|Net margin > 15%||25.5%||Pass|
|Balance sheet||Debt to equity < 50%||16.2%||Pass|
|Current ratio > 1.3||3.58||Pass|
|Opportunities||Return on equity > 15%||12.5%||Fail|
|Valuation||Normalized P/E < 20||17.50||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *3 1/4 year growth rate.
Since we looked at Molycorp last year, the company's score has jumped by three points. The rare-earth metal producer has become profitable and continues to see phenomenal growth, but its stock has plunged by more than 60% over the past year.
Molycorp has established itself as the premier rare-earth metals company. With a vertically integrated operation that includes mining, separation, refining, fabrication, and manufacturing, Molycorp's mine-to-magnet strategy has led to huge growth.
But potential threats exist on multiple fronts. Honda (NYSE: HMC ) expects to start recycling rare-earth elements from hybrid auto batteries this year, while Toyota (NYSE: TM ) is developing technology that could make rare-earth elements unnecessary.
More importantly, though, prices on some rare-earth elements have started to come down. That's arguably much worse news for Avalon Rare Metals (NYSE: AVL ) and Rare Element Resources (NYSE: REE ) , which have further to go before they become profitable. In the long run, though, weak pricing right now could give Molycorp an advantage by dissuading competition.
For Molycorp to keep improving, it needs to move forward with its plans and hope that China's stranglehold on the industry continues to support the company rather than hurting it. As long as new groundbreaking technology requires rare-earth metals, Molycorp will have plenty of potential as an industry leader.
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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