Is Gold Resource the Perfect Stock?
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, and then decide if Gold Resource (ASE: GORO) 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 Gold Resource.
What We Want to See
Pass or Fail?
Five-year annual revenue growth > 15%
One-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%
Five-year dividend growth > 10%
8 out of 9
Gold Resource glitters with a nearly perfect score. Yet the stock has gone just about nowhere over the past year in a challenging environment for gold miners.
Gold Resource is a relatively new player in the mining industry, with the company earning its first revenue in late 2010. The miner quickly became profitable, however, because of a low-cost structure after having spent years building out its Mexican mines. Yet Barrick Gold (NYS: ABX) and other big miners have had to shelve or delay projects due to rising costs, calling into question how long Gold Resource can keep its expenses low.
Gold Resource has also faced some operational challenges. In July, the miner cut its production guidance, sending the stock plummeting. With lower-grade ore also popping up, short-sellers were champing at the bit to bet against the gold miner.
For now, though, what truly sets Gold Resource apart is its dividend. Newmont Mining (NYS: NEM) and Hecla Mining (NYS: HL) have tied their cash dividends to the price of gold, while Eldorado Gold (NYS: EGO) also brings production into the mix. But Gold Resource actually pays its dividend in gold and silver bullion.
For Gold Resource to improve, it needs to get its production quality back up to snuff at its La Arista mine and hope for higher bullion prices. If it's fortunate enough to get those tailwinds, Gold Resource could score that final point in the near future.
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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The article Is Gold Resource the Perfect Stock? originally appeared on Fool.com.Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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.
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