Has Yamana 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, and then decide if Yamana Gold (NYSE: AUY  ) 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 Yamana Gold.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

38.3%

Pass

 

One-year revenue growth > 12%

8.9%

Fail

Margins

Gross margin > 35%

65.7%

Pass

 

Net margin > 15%

18.8%

Pass

Balance sheet

Debt to equity < 50%

10%

Pass

 

Current ratio > 1.3

2.89

Pass

Opportunities

Return on equity > 15%

5.6%

Fail

Valuation

Normalized P/E < 20

25.23

Fail

Dividends

Current yield > 2%

1.4%

Fail

 

Five-year dividend growth > 10%

38.7%

Pass

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Yamana Gold last year, the company has dropped a point. A slowdown in revenue growth is responsible for the score drop, but the stock has recently posted strong gains, leading it to a 35% overall gain in the past year.

Yamana has soared in recent years, but until recently, its stock had been stuck in the same doldrums the entire mining industry has suffered in 2012. With gold remaining below its 2011 highs, the rising costs of gold production have caused Barrick Gold (NYSE: ABX  ) , Kinross Gold (NYSE: KGC  ) , and several other miners to delay promising projects at current prices.

But Yamana hasn't let the adverse environment for miners stop it from making smart strategic moves. Earlier this year, Yamana bought Extorre Gold, braving the Argentine government's recent hostile attitude toward natural resources to pick up the lucrative Cerro Moro mine. Yamana has had to deal with friction in Argentina in other contexts, as its Alumbrera joint venture with Goldcorp (NYSE: GG  ) and Xstrata suffered halted shipments after the government shortened the time limit for repatriating mining revenue from 180 days to just 15 days.

Yamana also appeals to dividend investors. Although its yield looks like nothing special, the growth in recent years is impressive. Late last year, Yamana CEO Peter Marrone said he didn't think a dividend strictly linked to gold prices, as Newmont Mining (NYSE: NEM  ) has implemented, made a lot of sense. He prefers a more stable dividend that is sustainable even if gold prices drop.

For Yamana to improve, a continuation of the bull market in gold would obviously be welcome. Even without it, though, Yamana is proving its mettle in metals and stands to outpace its competitors in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Yamana Gold is a strong choice, but we've got another gold stock that deserves your attention. 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 Yamana 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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