Has Silver Wheaton 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 Silver Wheaton (NYSE: SLW  ) 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 Silver Wheaton.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 35.4% Pass
  1-Year Revenue Growth > 12% 30.7% Pass
Margins Gross Margin > 35% 87.3% Pass
  Net Margin > 15% 73.0% Pass
Balance Sheet Debt to Equity < 50% 2.3% Pass
  Current Ratio > 1.3 6.30 Pass
Opportunities Return on Equity > 15% 21.5% Pass
Valuation Normalized P/E < 20 37.39 Fail
Dividends Current Yield > 2% 1.0% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   7 out of 9

Source: S&P Capital IQ. NM = not meaningful; Silver Wheaton started paying a dividend in March 2011. Total score = number of passes.

Since we looked at Silver Wheaton last year, the company has held onto the extra seventh point it earned compared to two years ago. Investors have faced an up-and-down market, but the stock has managed to post a 10% gain over the past year.

Silver Wheaton isn't a silver miner, although its fortunes are undeniably tied to the success of mining. As a silver streaming company, Silver Wheaton provides financing for miners in exchange for the right to purchase streams of future silver production at negotiated prices. These prices are generally well below silver's market price, providing Silver Wheaton with its profit. The company counts Goldcorp (NYSE: GG  ) and Barrick Gold (NYSE: ABX  ) among its streaming customers, along with plenty of small mining companies.

Throughout much of the past year, precious metals prices languished as a general global economic slowdown threatened to reduce demand for industrial metals. By June, iShares Silver Trust (NYSE: SLV  ) , which tracks the price of silver, had lost nearly half its value from its 2011 highs. But in the past few months, precious metals have rebounded sharply as central banks around the world pull out all the stops to stimulate economic growth.

Silver Wheaton's deals have only a limited lifespan, so it has to find new contracts to replace them. For instance, its contracts relating to several of Barrick's mines expire in 2013, but Silver Wheaton did a deal with Hudbay Minerals (NYSE: HBM  ) to invest $750 million in exchange for several years' worth of gold and silver production from Hudbay's mines.

For Silver Wheaton to improve, it needs to keep its already rising dividend moving in the right direction and then boost earnings to reflect its true profit potential. If it can succeed, perfection awaits close at hand.

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.

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Click here to add Silver Wheaton 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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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 March 21, 2013, at 7:39 PM, jargonific wrote:

    Bought some shares after earnings March 21, 2013 but a little concerned that there were not more people buying. Earnings came in late and no analysis available. Anyone have thoughts? Does anyone buy Silver Wheaton Corp Grey Market shares SLVWF?

    Are these earnings a yeah or a neah?

    6:52 PM ET Silver Wheaton declares first quarterly dividend payment for 2013

    PR Newswire

    6:51 PM ET Silver Wheaton 4Q Net $177.7M >SLW.TDow Jones

    6:51 PM ET Silver Wheaton Sees 2013 Attributable Production Up 13% >SLW.T

    Dow Jones

    6:50 PM ET Silver Wheaton 4Q Rev $287.2M >SLW.TDow Jones

    6:50 PM ET Silver Wheaton 4Q EPS 50c >SLW.TDow Jones

    6:49 PM ET Silver Wheaton reports record 2012 operating and financial resultsPR Newswire

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