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.
What We Want to See
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.
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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