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 Pan American Silver
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 Pan American Silver.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||38.9%||Pass|
|1-Year Revenue Growth > 12%||39%||Pass|
|Margins||Gross Margin > 35%||51.6%||Pass|
|Net Margin > 15%||17.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||4.76||Pass|
|Opportunities||Return on Equity > 15%||7.9%||Fail|
|Valuation||Normalized P/E < 20||32.57||Fail|
|Dividends||Current Yield > 2%||0.3%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Pan American Silver just started paying a dividend in 2010. Total score = number of passes.
Pan American Silver scores six points on an adjusted nine-point scale. But with silver prices having skyrocketed recently, investors have seen the silver miner's stock perform just about perfectly.
Given how strongly the price of silver has risen lately, picking a silver-related investment may seem like shooting fish in a barrel. Even bullion ETF iShares Silver Trust
But miners like Pan American have growth potential that bullion ETFs lack. The company recently announced that it grew its production for the 15th straight year to 24.3 million ounces, with profits surging 67% over the year-ago quarter. Unfortunately, higher labor costs and exchange rates have forced Pan American to project higher costs in 2011, and the miner expects production to decline this year, breaking that growth streak. But the company still holds out hope that it will be able to double production if the Argentine government allows its Navidad project to go forward.
With average annual share returns of 75% over the past two years and 29% since 2001, Pan American has grown to the point where it likely won't deliver the truly explosive multibagger returns that smaller miners Great Panther Silver
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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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 owns shares of iShares Silver Trust. 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.