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 Gold Fields (NYSE: GFI ) 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 Gold Fields.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||18.8%||Pass|
|1-Year Revenue Growth > 12%||24.5%||Pass|
|Margins||Gross Margin > 35%||35.1%||Pass|
|Net Margin > 15%||18.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||35.5%||Pass|
|Current Ratio > 1.3||1.74||Pass|
|Opportunities||Return on Equity > 15%||18.5%||Pass|
|Valuation||Normalized P/E < 20||9.38||Pass|
|Dividends||Current Yield > 2%||3.7%||Pass|
|5-Year Dividend Growth > 10%||16.1%||Pass|
|Total Score||10 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Gold Fields shines with a perfect 10. Yet despite that score, the stock hasn't had a perfect performance, having lost 15% in the past year.
Like many gold miners, Gold Fields has gotten caught by the correction in gold prices over the past year or so. With gold still well below its highs from early 2011, miners across the spectrum have faced the unappetizing combination of lower revenue and higher costs. The situation has been bad enough that several big producers have chosen to delay what would have been lucrative projects, with Kinross Gold (NYSE: KGC ) having put off building out its Mauritanian Tasiast mine and Jaguar Mining (NYSE: JAG ) having had difficulty finding capital to develop its Gurupi mine. Gold Fields now believes that $1,500 per ounce is a reasonable baseline against which to judge prospective projects going forward.
Gold Fields is arguably best known for deals it has made over the years. For instance, Aurcana owes its promising Presidio mine to Gold Fields having given up its ownership of the property. On the buying side, Gold Fields bought minority interests in two Ghanaian gold mines in 2011 from IAMGOLD (NYSE: IAG ) , cementing its ownership stake in the mines.
Still, Gold Fields has faced problems. Labor unrest in South Africa has taken its toll, and although the platinum market has gotten hit harder by strikes than gold, Gold Fields also lost production from labor disputes. At the same time, its deep mines present logistical challenges similar to those that hampered Hecla Mining (NYSE: HL ) earlier this year with its Lucky Friday mine.
The key, though, is that Gold Fields has overcome all these challenges and now trades at a highly attractive valuation. As a perfect stock by our scale, I'm making a positive CAPScall on Gold Fields, and if the gold market cooperates, the company could stay strong for the foreseeable future.
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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