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 AuRico Gold (NYSE: AUQ) 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 AuRico Gold.
|
Factor
|
What We Want to See
|
Actual
|
Pass or Fail?
|
| Growth |
5-Year Annual Revenue Growth > 15% |
24.3% |
Pass |
|
1-Year Revenue Growth > 12% |
27.0% |
Pass |
| Margins |
Gross Margin > 35% |
59.3% |
Pass |
|
Net Margin > 15% |
41.7% |
Pass |
| Balance Sheet |
Debt to Equity < 50% |
12.9% |
Pass |
|
Current Ratio > 1.3 |
2.55 |
Pass |
| Opportunities |
Return on Equity > 15% |
8.0% |
Fail |
| Valuation |
Normalized P/E < 20 |
10.79 |
Pass |
| Dividends |
Current Yield > 2% |
0% |
Fail |
|
5-Year Dividend Growth > 10% |
0% |
Fail |
|
|
|
|
|
Total Score |
|
7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at AuRico Gold last year, the company has gained a point. But slowing revenue growth has spooked investors into selling off the stock, which has lost more than half its value in the past year. Still, many of the internal financials for AuRico have actually improved since our last look at the company, even if recent news has many investors uncertain about the miner's future.
Gold miners across the industry have gotten crushed, even as gold prices have actually stayed relatively stable. From industry giants Goldcorp (NYSE: GG) and Barrick Gold (NYSE: ABX) on down the line to smaller producers, rising operational costs have convinced investors that the good times for the industry are over. AuRico has seen that trend as well, with expectations that capital expenditures will need to rise for its project development this year.
For its part, AuRico has made a number of smart moves to shore up its position. The company beat out Primero Mining (NYSE: PPP) to pick up Northgate Minerals last year, with its lucrative Young-Davidson mine just having started commercial production last week. Meanwhile, AuRico also sold its El Cubo mine to Endeavour Silver (NYSE: EXK) along with a second project, giving the company extra cash to consider strategic acquisitions that fit better with its overall strategy.
Still, not everything has gone right for the company. Last week, AuRico substantially cut its production guidance for its Ocampo mine in Mexico, projecting that it will produce around 40,000 fewer ounces of gold this year and 50,000 fewer gold ounces next year than it had previously believed. The news sent the shares plunging almost 20%.
For AuRico to improve, it needs to find ways to push back against rising costs and maintain production levels. In the meantime, rising gold prices could help pull AuRico and its peers back into the big bull market they experienced for much of the past several years.
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.
If you like gold, we've got a stock you should really take a look at. Read the Motley Fool's latest special report on gold to discover the tiny gold stock digging up massive profits. It's free but only available for a limited time.
Click hereto add AuRico Gold to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.