Is Northgate Minerals the Perfect Stock?

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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 Northgate Minerals (ASE: NXG) 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 Northgate Minerals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%10%Fail
 1-Year Revenue Growth > 12%(0.7%)Fail
MarginsGross Margin > 35%34.4%Fail
 Net Margin > 15%(11.6%)Fail
Balance SheetDebt to Equity < 50%31.3%Pass
 Current Ratio > 1.33.55Pass
OpportunitiesReturn on Equity > 15%(10.7%)Fail
ValuationNormalized P/E < 20NMNM
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 2 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.

Northgate Minerals can only dig up two points. The gold producer has taxed the patience of enthusiastic investors, but it has a huge project set for next year that could change everything for the company.

Nearly everyone knows that gold prices have been on a rampage lately, soaring over $1,600 per ounce as sovereign debt fears around the world reduce confidence in paper currencies. But even with higher prices, major gold producers Barrick Gold (NYS: ABX) , Goldcorp (NYS: GG) , and Newmont Mining (NYS: NEM) have failed to reach new highs in the past month.

In that negative environment, Northgate has also seen restrained share price growth, especially as its former flagship Kemess South mine has now closed. But that may be about to change. As Fool gold expert Christopher Barker explains, Northgate's key Young-Davidson mine is set to start producing next year, and indications are that it could be huge. Barker also points to a new discovery zone nearby that also has big potential.

The company has also made attempts to diversify its holdings. Earlier this month, it offered to acquirePrimero Mining. That would give Northgate not only more gold but also silver exposure, with Primero's agreements with Silver Wheaton (NYS: SLW) already fulfilled for the year.

With mining companies, financials often look ugly right before the big strike. Northgate may not look perfect by traditional standards, but if Barker's thesis plays out, there could be a lot of upside for investors willing to take the risk.

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.

Click hereto add Northgate Minerals 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."

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. 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 adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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