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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 Teck Resources (NYSE: TCK ) 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 Teck Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.6%||Fail|
|1-Year Revenue Growth > 12%||11.3%||Fail|
|Margins||Gross Margin > 35%||38.7%||Pass|
|Net Margin > 15%||16.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||38.7%||Pass|
|Current Ratio > 1.3||3.48||Pass|
|Opportunities||Return on Equity > 15%||11.5%||Fail|
|Valuation||Normalized P/E < 20||7.77||Pass|
|Dividends||Current Yield > 2%||2.7%||Pass|
|5-Year Dividend Growth > 10%||(4.4%)||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Teck Resources last year, the company has maintained its six-point score. But the stock has lost about a quarter of its value as the general malaise in the commodities realm has hurt the company.
Many investors tend to focus on precious metals like gold and silver. But Teck Resources has had great success with more pedestrian products, including copper and coal. During the huge expansion in emerging-market economies, Teck's mined metals were greatly in demand, and thanks in part to a big ramp-up in production at its Antamina joint venture with BHP Billiton (NYSE: BHP ) , Teck has been able to boost supply to take advantage of that trend.
Unfortunately, the slowdown in China has hit the metals markets hard. Just as Freeport-McMoRan Copper & Gold (NYSE: FCX ) has struggled with lackluster copper prices, Teck reported a 14% drop in realized copper prices during its second quarter. Moreover, on the metallurgical coal side of the business, both Alpha Natural Resources (NYSE: ANR ) and Teck have struggled with weaker worldwide steel production. It also hasn't helped matters that labor problems with railroad Canadian Pacific (NYSE: CP ) hurt Teck's coal production.
Moreover, scandals in the futures markets have reduced confidence in commodities. With Fool contributor and metals expert Christopher Barker pointing to widespread manipulation of commodity markets, it sometimes appears as if Teck is facing a rigged table.
For Teck to improve, it needs emerging markets to awaken and for demand for materials to resume. With recent calls for a major Chinese stimulus program, Teck may have gotten the catalyst it needs to try to move upward toward perfection once more.
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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