Has Primero Mining 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 Primero Mining (NYSE: PPP  ) 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 Primero Mining.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% NM NM
  1-Year Revenue Growth > 12% 35.3% Pass
Margins Gross Margin > 35% 61.7% Pass
  Net Margin > 15% 57.7% Pass
Balance Sheet Debt to Equity < 50% 13.9% Pass
  Current Ratio > 1.3 2.48 Pass
Opportunities Return on Equity > 15% 21.8% Pass
Valuation Normalized P/E < 20 14.25 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   7 out of 9

Source: S&P Capital IQ. NM = not meaningful; Primero Mining has only had meaningful revenue since 2010. Total score = number of passes.

With seven points, Primero Mining looks pretty golden. The stock has nearly doubled over the past year, with just about all of that gain having come just since July.

Primero's crown jewel is its San Dimas mine, which it obtained from Goldcorp (NYSE: GG  ) back in 2010. As Fool gold and silver expert Christopher Barker pointed out at the time, Primero got a steal of a deal, paying just $500 million for more than $2 billion in proven and probable gold and silver reserves.

Not everything has gone right for Primero, though. Last year, it lost out on a chance to acquire Northgate Minerals, with rival AuRico Gold (NYSE: AUQ  ) beating Primero's bid. Moreover, Primero has had to deal with a problem with Mexican taxes related to its silver-streaming deal with Silver Wheaton (NYSE: SLW  ) , although Primero's CEO is confident of a favorable resolution.

After reassessing its geological models, Primero has recently come into its own. With a potential expansion of the San Dimas mill to increase processing capacity, Primero could easily keep rising even if its peers in the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) stay stagnant.

For Primero to improve, it simply needs to build a longer history of revenue growth. When it gets to the point where a dividend makes sense, then Primero may become a truly perfect stock.

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 Primero Mining 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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  • Report this Comment On September 27, 2012, at 11:27 PM, Jellywig wrote:

    Dan I'm up 80% on the stock and that's perfect enough for me. My question is, why the hell don't you own any? CEF is a good call but that's it in this sector for you?

  • Report this Comment On October 04, 2012, at 6:45 AM, TMFGalagan wrote:

    @Jellywig - I've had a good ride on my bullion plays, and that's generally how I like to invest in gold and silver. That said, I do own some shares in a standard metals/miners mutual fund that includes a bunch of miners.

    best,

    dan (TMF Galagan)

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