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 Hecla Mining (NYS: HL) 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 Hecla Mining.
What We Want to See
Pass or Fail?
5-year annual revenue growth > 15%
1-year revenue growth > 12%
Gross margin > 35%
Net margin > 15%
Debt to equity < 50%
Current ratio > 1.3
Return on equity > 15%
Normalized P/E < 20
Current yield > 2%
5-year dividend growth > 10%
7 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of seven, Hecla Mining is shining bright. The silver miner has benefited from a huge run-up in silver prices in recent years, but some company-specific problems threw a wrench into the bull market for the stock.
Hecla is one of the lowest-cost silver producers in the industry, with cash costs of just over $0.50 per ounce during the first quarter of 2011. Even Silver Wheaton's (NYS: SLW) enviable streaming strategy can't beat out the attractive cost structure that Hecla has.
Unfortunately, some old problems from way back in the company's history came back to haunt Hecla recently. Unlike Coeur d'Alene Mines (NYS: CDE) , Hecla never settled litigation brought by the Coeur d'Alene Indian tribe relating to heavy-metal-laden waste rock that several miners dumped into the Coeur d'Alene river basin through the 1960s. A potential settlement for $262 million would be a significant hit to the company's financial resources.
Those problems have held Hecla back from some of the gains that competitors Endeavour Silver (ASE: EXK) and Pan American Silver (NAS: PAAS) have seen recently. But with plans to boost production by 50% or more over the next five years, Hecla certainly isn't taking $40 silver for granted -- rather, it wants to take maximum advantage for as long as the sun is shining on the industry.
At some point, Hecla could start paying a dividend, pushing it that much closer to perfection. As long as silver prices stay high, Hecla will likely stay kind to its shareholders.
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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At the time thisarticle 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.
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