Has Cameco 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 whether Cameco (NYSE: CCJ  ) 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.
  • Moneymaking 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 Cameco.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

0.1%

Fail

 

1-Year Revenue Growth > 12%

11.8%

Fail

Margins

Gross Margin > 35%

45.3%

Pass

 

Net Margin > 15%

20.8%

Pass

Balance Sheet

Debt to Equity < 50%

20.3%

Pass

 

Current Ratio > 1.3

3.31

Pass

Opportunities

Return on Equity > 15%

9.7%

Fail

Valuation

Normalized P/E < 20

23.55

Fail

Dividends

Current Yield > 2%

2.2%

Pass

 

5-Year Dividend Growth > 10%

15.3%

Pass

       
 

Total Score

 

6 out of 10

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

Since we looked at Cameco last year, the company has gained a point after holding steady from 2010 to 2011. A slightly better yield came largely from weaker stock prices, though, with the shares down about 10% over the past year.

When we first looked at Cameco a couple years ago, uranium producers were flying high. In an environment in which fossil fuels were costly and controversial, nuclear energy held the promise of being a cleaner source of power. But the Japanese Fukushina Daiichi nuclear plant failure in early 2011 and the discovery of cheap and plentiful natural gas supplies have turned many away from nuclear power and reduced demand for uranium. For instance, NRG Energy (NYSE: NRG  ) chose to write off major losses on its South Texas Nuclear Development Project. The poor environment in turn has led to continued weakness for Cameco, as well as fellow producers Denison Mines (NYSEMKT: DNN  ) and Uranerz Energy (NYSEMKT: URZ  ) , all of which have seen substantial share-price declines.

Still, the fundamental benefits of nuclear power aren't going anywhere. The Nuclear Regulatory Commission approved its first new nuclear reactor in 30 years earlier in 2012, giving Southern (NYSE: SO  ) the go-ahead. Although current low natural gas prices make nuclear plants less economically viable, long-run trends might well prove to be much different. Moreover, China still seems poised to boost its nuclear output substantially, and Cameco in particular stands to benefit from a contract to supply millions of pounds of fuel to the country between now and 2025.

For Cameco to improve, it needs to hold out until natural gas prices rise far enough to make nuclear energy more viable again. That may take a while, but eventually, concerns about carbon emissions may prove to be the catalyst to get Cameco moving forward more strongly.

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.

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Click here to add Cameco to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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