Is Cameco the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether Cameco (NYSE: CCJ  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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% 13.4% fail
  1-Year Revenue Growth > 12% 4.7% fail
Margins Gross Margin > 35% 43.1% pass
  Net Margin > 15% 44.5% pass
Balance Sheet Debt to Equity < 50% 20.8% pass
  Current Ratio > 1.3 4.12 pass
Opportunities Return on Equity > 15% 12.6% fail
Valuation Normalized P/E < 20 33.81 fail
Dividends Current Yield > 2% 0.9% fail
  5-Year Dividend Growth > 10% 18.8% pass
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 5, Cameco puts in a middling performance. With interesting in mining companies generally running very high, the company enjoys a niche that few of its competitors can match.

Cameco is one of the world's largest uranium producers, hitting the No. 2 spot in 2009 after Areva. It's the main owner of the McArthur River site in Canada, the biggest uranium-producing mine in the world.

In the search for low-carbon energy production, many countries are turning to nuclear power. Earlier this year, the company projected 108 new nuclear reactors being built by 2019, with China being the standout, expecting 42 new reactors. The corresponding demand for uranium should help Cameco, although foreign miners Rio Tinto (NYSE: RIO  ) and BHP Billiton (NYSE: BHP  ) , which are also major producers, have the geographical edge of having Australian-based assets closer to Asian markets.

Compared to smaller competitors Dennison Mines (AMEX: DNN  ) and Uranium Resources (Nasdaq: URRE  ) , Cameco has the major advantage of being profitable. The company fetches a premium valuation right now, thanks to investor interest. But if the commodities boom continues and interest in nuclear energy remains strong, then the resulting growth in sales, combined with a continuing history of strong dividend growth, could very well justify paying up for Cameco shares.

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.

Click here to add Cameco 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 in this article. The Fool owns shares of and has written covered calls on Cameco. Try any of our Foolish newsletter services free for 30 days. 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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