Has Eldorado Gold 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 Eldorado Gold (NYSE: EGO  ) 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 Eldorado Gold.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 45.6% Pass
  1-Year Revenue Growth > 12% 30.6% Pass
Margins Gross Margin > 35% 67.1% Pass
  Net Margin > 15% 26.8% Pass
Balance Sheet Debt to Equity < 50% 2.0% Pass
  Current Ratio > 1.3 2.83 Pass
Opportunities Return on Equity > 15% 7.2% Fail
Valuation Normalized P/E < 20 27.73 Fail
Dividends Current Yield > 2% 1.0% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   6 out of 9

Source: S&P Capital IQ. NM = not meaningful; Eldorado paid its first dividend in Aug. 2011. Total score = number of passes.

Since we looked at Eldorado Gold last year, the company has kept its six-point score. But a tough environment for gold miners has cost the stock 25% of its value over the past year, albeit with shares having rebounded sharply in the past couple of months.

Gold's decade-long bull market has increased investor interest in the yellow metal and the miners that dig it up. But, after substantial gains in past years, gold stocks have faced a lot of challenges recently, as a pause in gold's long run higher combined with production issues have plagued the mining industry.

Eldorado hasn't been immune to such pressures. In late July, the miner cut its 2012 production estimates by 20%, with its Jinfeng mine in China seeing a 45% drop in output to deal with mining waste.

Yet, putting these short-term troubles aside, Eldorado looks like a stunning value play. It can't quite match up to IAMGOLD's (NYSE: IAG  ) $103 per ounce valuation based on proved, probable, and inferred reserves, but at $172 per ounce, it compares quite favorably to Goldcorp's (NYSE: GG  ) much higher $253.

Moreover, investors are starting to reap the benefits of Eldorado's dividend policy. Just as Newmont Mining (NYSE: NEM  ) and Hecla Mining (NYSE: HL  ) tie their payouts to bullion prices, Eldorado gears its payout to reflect both production and the price of gold. That may produce bumps in the road from short-term-production cuts, but in the long run, it means more money for investors.

For Eldorado to improve, it needs to overcome pressures to its returns on equity and work on boosting earnings to reflect its full potential. If it can do so, Eldorado could get a lot closer to perfection in the years to come.

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 out the best investments from the rest.

If you like investing in metals, we've got a stock you should really take a look at. 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 Eldorado Gold 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. 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.


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