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 Silvercorp Metals (NYSE: SVM ) 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 Silvercorp Metals.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||29.7%||Pass|
|1-Year Revenue Growth > 12%||6.2%||Fail|
|Margins||Gross Margin > 35%||68.9%||Pass|
|Net Margin > 15%||25.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||4.65||Pass|
|Opportunities||Return on Equity > 15%||15.3%||Pass|
|Valuation||Normalized P/E < 20||14.22||Pass|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||14.9%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Silvercorp Metals last year, the company has kept its eight-point score. But a huge deceleration in the miner's revenue growth due to a drop in silver prices from their highs last year is responsible for the stock's having lost about a third of its value over the past year.
This time last year, Silvercorp was dealing with allegations of fraud. Yet after Fool contributor and mining expert Christopher Barker set the record straight on the company's Chinese subsidiaries, the stock recovered quickly.
Yet broader concerns throughout the silver industry have weighed on Silvercorp and several of its peers. Just as higher production costs have plagued many gold miners, silver miners are feeling the pinch as well. Fortuna Silver Mines (NYSE: FSM ) , for instance, has faced higher costs at its Caylloma mine. Still, Silvercorp boasts exceptionally low costs in processing ore, trailing only First Majestic (NYSE: AG ) among U.S. listed silver miners.
As competition increases, Silvercorp will feel pressure to keep up with production growth. Endeavour Silver (NYSE: EXK ) now expects to beat out Silvercorp's output for 2012 thanks to the El Cubo mine it recently bought from AuRico Gold (NYSE: AUQ ) . Similarly, consolidation across the industry could make it harder for Silvercorp to match its competitors unless it finds strategic partnerships of its own.
For Silvercorp to improve, it needs to make the most of stabilizing silver prices to boost production. If the market cooperates and allows the company to boost its dividend, then Silvercorp could become a perfect stock 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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