Is Gold Resource 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 Gold Resource (NYSEMKT: GORO  ) 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 Resource.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

NM

NM

 

One-year revenue growth > 12%

208%

Pass

Margins

Gross margin > 35%

66.8%

Pass

 

Net margin > 15%

50.7%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

6.25

Pass

Opportunities

Return on equity > 15%

100.6%

Pass

Valuation

Normalized P/E < 20

26.26

Fail

Dividends

Current yield > 2%

3.5%

Pass

 

Five-year dividend growth > 10%

36.1%*

Pass

       
 

Total Score

 

8 out of 9

Source: S&P Capital IQ. NM = not meaningful; Gold Resource had no revenue five years ago. Total score = number of passes. *Average growth rate since first dividend in August 2010.

Gold Resource glitters with a nearly perfect score. Yet the stock has gone just about nowhere over the past year in a challenging environment for gold miners.

Gold Resource is a relatively new player in the mining industry, with the company earning its first revenue in late 2010. The miner quickly became profitable, however, because of a low-cost structure after having spent years building out its Mexican mines. Yet Barrick Gold (NYSE: ABX  ) and other big miners have had to shelve or delay projects due to rising costs, calling into question how long Gold Resource can keep its expenses low.

Gold Resource has also faced some operational challenges. In July, the miner cut its production guidance, sending the stock plummeting. With lower-grade ore also popping up, short-sellers were champing at the bit to bet against the gold miner.

For now, though, what truly sets Gold Resource apart is its dividend. Newmont Mining (NYSE: NEM  ) and Hecla Mining (NYSE: HL  ) have tied their cash dividends to the price of gold, while Eldorado Gold (NYSE: EGO  ) also brings production into the mix. But Gold Resource actually pays its dividend in gold and silver bullion.

For Gold Resource to improve, it needs to get its production quality back up to snuff at its La Arista mine and hope for higher bullion prices. If it's fortunate enough to get those tailwinds, Gold Resource could score that final point in the near future.

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.

If you like investing in metals, we've got another 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, so click here to get your copy today.

Click here to add Gold Resource 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.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2053108, ~/Articles/ArticleHandler.aspx, 10/2/2014 9:01:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement