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 Pan American Silver Corp. (USA) (NASDAQ:PAAS) 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 Pan American Silver Corp. (USA) (NASDAQ:PAAS).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 25.3% | Pass |
| 1-year revenue growth > 12% | 8.6% | Fail | |
| Margins | Gross margin > 35% | 45.2% | Pass |
| Net margin > 15% | 9.4% | Fail | |
| Balance sheet | Debt to equity < 50% | 2.9% | Pass |
| Current ratio > 1.3 | 4.96 | Pass | |
| Opportunities | Return on equity > 15% | 4% | Fail |
| Valuation | Normalized P/E < 20 | 20.99 | Fail |
| Dividends | Current yield > 2% | 3% | Pass |
| 5-year dividend growth > 10% | NM | NM | |
| Total score | 5 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Pan American Silver paid its first dividend in 2010. Total score = number of passes.
Since we looked at Pan American Silver last year, the company has dropped three full points, as margins, revenue growth, return on equity, and valuations have all gotten worse even as the dividend yield has risen. The stock has also struggled, falling 25% over the past year.
The entire mining industry has run into troubles recently, underperforming the price of gold and silver bullion as high production costs and other headwinds have hurt their results. The iShares Silver Trust (ETF) (NYSEMKT:SLV) has fallen more than 10% over the past year as the metal has taken a break from its long bull market, and Hecla Mining Company (NYSE:HL) has also seen declines as its Lucky Friday mine remained shuttered for more than a year until it reopened last month.
