Has North American Palladium 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, then decide if North American Palladium (AMEX: PAL  ) 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 North American Palladium.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.8% Fail
  1-Year Revenue Growth > 12% 134.5% Pass
Margins Gross Margin > 35% 22.1% Fail
  Net Margin > 15% (2.3%) Fail
Balance Sheet Debt to Equity < 50% 0.6% Pass
  Current Ratio > 1.3 3.46 Pass
Opportunities Return on Equity > 15% (1.2%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at North American Palladium last year, the miner has picked up a point. Huge revenue growth reversed sales drops in past years, but the company still has a long way to go to get back toward its pinnacle of a decade ago.

North American Palladium is one of the few miners that focus on platinum-group metal mining. In fact, with fellow platinum and palladium producer Stillwater Mining (NYSE: SWC  ) having bought gold and copper miner Peregrine Metals, North American Palladium remains as a rare pure play on the platinum-group metals, along with South Africa-headquartered Anooraq Resources (NYSE: ANO  ) .

Some investors may be tempted to lump palladium miners in with rare-earth metals producers like Molycorp (NYSE: MCP  ) and Rare Element Resources (AMEX: REE  ) , given the relative scarcity of palladium in comparison to gold. But palladium has had a key industrial use in catalytic converters for decades, and its price is partially tied to the health of automakers. A decade ago, Ford made a disastrous move, locking in $1,000 prices for its palladium supply; the metal fell below $200 before rebounding to its current $650 level.

Even with favorable prices, though, North American Palladium as a company has left much to be desired. With production costs at around $500 per ounce, its margins are fairly thin even at palladium's elevated prices. Moreover, the company has faced production problems, although an expansion of its Lac des Iles mine could lead to boosts in production.

In the long run, North American Palladium needs to see both high platinum and palladium prices and better operating results. Unless it can achieve both of those goals, North American Palladium won't become a perfect stock anytime soon.

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 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.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

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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  • Report this Comment On November 14, 2011, at 8:27 PM, lwaltretired wrote:

    I wonder just how much time Mr Caplinger spent studying PAL.

    I can't say it's a great investment, but I do know that PAL, like Stilllwater, ownes several Gold mines, which Mr. Caplinger seems to not know of.

    Granted, these Gold mines are not yet adding to their bottom line, but any investor will surely know about them. Yeah, if you look at the financials PAL is not hitting on all cylinders, but there's a lot more there to believe in, when you know the whole story. They are building for their future at the expense of the current year. At first I too was very disapointed, with their Gold mine purchases and their allowing mine Expansion to delay production, but I'm sticking with them, and betting a lot of my future on their vision. I suggest that those potential investors in PAL take a long hard look into the avaliable info at ther Company Site and if you believe that there is a short fall of Palladium and that China, India, Brazil, and the USA are going to be making a bunch of Autos, then you too may be willing to invest.

    I am Long PAL and Stillwater

    walt

  • Report this Comment On December 16, 2011, at 9:02 AM, DukeOfEarl56 wrote:

    Good thing come to those who wait and are long.

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