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 Vale
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 Vale.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||21.6%||Pass|
|1-Year Revenue Growth > 12%||94.4%||Pass|
|Margins||Gross Margin > 35%||61%||Pass|
|Net Margin > 15%||41.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||34%||Pass|
|Current Ratio > 1.3||2.12||Pass|
|Opportunities||Return on Equity > 15%||33.2%||Pass|
|Valuation||Normalized P/E < 20||7.90||Pass|
|Dividends||Current Yield > 2%||2.8%||Pass|
|5-Year Dividend Growth > 10%||5.6%||Fail|
|Total Score||9 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With nine points, Vale falls just short of perfection. The mining giant is a big part of what has brought Brazil to the forefront of the emerging-market scene.
Together with BHP Billiton
But with commodities of all sorts seeing prices soar, Vale hasn't been content to stick solely with iron ore. Last year, the company launched a tender offer to buy a copper refining and processing company that would help it treat the copper that Vale mines, which has a significant amount of contaminants.Vale won't reach the scale of copper giant Freeport-McMoRan Copper & Gold
Lately, though, the company has gone through some political intrigue. With the election of President Dilma Rousseff to lead Brazil, a new CEO, Murilo Ferreira, took over for former top executive Roger Agnelli. The new appointment may cause shareholders to take a backseat to national interests, but Vale's huge profits suggest that even that handicap wouldn't necessarily cause a lot of pain.
With China arguably starting to overheat and the health of the global economy in doubt, Vale faces significant risks. But even with such a bright past, Vale looks poised to meet the future with what it takes to reach true perfection.
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."