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.
What We Want to See
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.
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.
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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."