Is North American Palladium 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 if North American Palladium (AMEX: PAL  ) 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, however, 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 North American Palladium.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (26.4%) fail
  1-Year Revenue Growth > 12% (34.2%) fail
Margins Gross Margin > 35% (38.3%) fail
  Net Margin > 15% (157.8%) fail
Balance Sheet Debt to Equity < 50% 1.3% pass
  Current Ratio > 1.3 8.57 pass
Opportunities Return on Equity > 15% (23.6%) fail
Valuation Normalized P/E < 20 NM fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings over the period. Total score = number of passes.

With a score of 2, North American Palladium certainly has an ugly set of financials. As its name suggests, the platinum-group metal miner's fortunes are tied to the price of palladium, a rare precious metal used primarily in catalytic converters for car exhaust systems.

The company's heyday was around 10 years ago. After years of losses, the miner earned profits from 2000 to 2003, as the price of palladium jumped eight-fold to more than $1,000 an ounce in early 2001. That demand fed on itself, as Ford Motor (NYSE: F  ) stockpiled huge stores of the metal to lock in prices on its future production needs.

By 2003, though, palladium prices had plummeted back down to $200, and both North American Palladium and rival producer Stillwater Mining (NYSE: SWC  ) had seen their stock prices plunge. North American Palladium returned to losses and had to shutter its Lac des Iles mine in 2008.

Now, though, palladium prices are on the rise again. That has allowed the company to reopen its flagship mine. In light of renewed investor interest in the metal from ETFs like ETFS Physical Palladium Shares (NYSE: PALL  ) , palladium's uptrend could continue for some time.

If North American Palladium can capitalize on higher prices this time around, it could easily see its financial picture turn around. The question, though, is whether it can sustain that success -- or if it will merely be another flash in the pan for shareholders.

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 North American Palladium 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. Ford Motor is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, 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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