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 Cameco (NYS: CCJ) 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 Cameco.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.5%||Fail|
|1-Year Revenue Growth > 12%||(1.4%)||Fail|
|Margins||Gross Margin > 35%||42.8%||Pass|
|Net Margin > 15%||18.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||21.3%||Pass|
|Current Ratio > 1.3||3.65||Pass|
|Opportunities||Return on Equity > 15%||7.5%||Fail|
|Valuation||Normalized P/E < 20||33.53||Fail|
|Dividends||Current Yield > 2%||1.9%||Fail|
|5-Year Dividend Growth > 10%||22.4%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Cameco last year, the company has held onto its five-point score. But the uranium producer has taken a huge hit as world perception of the nuclear industry has done an about-face.
Last year, nuclear power looked like one of the best answers to concerns about carbon emissions. As the leader in uranium mining, Cameco was poised to take advantage of demand for the radioactive element. With more than 60 new reactors under construction and another 150-plus planned or on order as of early this year, it looked like the sky was the limit, with both uranium producers as well as plant builders General Electric (NYS: GE) and Siemens (NYS: SI) in position to reap the benefits.
But then, the Japanese tsunami and earthquake caused major problems at the Fukushima Daiichi nuclear power plant, and governments around the world started rethinking their approaches to nuclear power. Germany set in motion a complete phase-out of nuclear energy, while other countries suspended plans to build new power plants. That sent share prices for the entire industry plummeting, with Denison Mines (ASE: DNN) , Ur-Energy (ASE: URG) , and USEC (NYS: USU) dropping even more precipitously than the larger Cameco.
Going forward, it's unclear what will pull Cameco out of its downward spiral. The key may well be China, which is likely to continue its planned nuclear expansion despite public concerns. If the Japanese disaster fades into the background as much as Three Mile Island did in the U.S., then given enough time, Cameco could easily emerge from this as a better stock.
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 here to add Cameco 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 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.