Has Southern Copper Become the Perfect Stock?
Dec 15th 2011 10:03AM
Updated Dec 15th 2011 4:28PM
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 Southern Copper (NYS: SCCO) 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 Southern Copper.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.0%||Fail|
|Â||1-Year Revenue Growth > 12%||38.9%||Pass|
|Margins||Gross Margin > 35%||60.8%||Pass|
|Â||Net Margin > 15%||34.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||66.6%||Fail|
|Â||Current Ratio > 1.3||4.18||Pass|
|Opportunities||Return on Equity > 15%||57.3%||Pass|
|Valuation||Normalized P/E < 20||11.52||Pass|
|Dividends||Current Yield > 2%||9.5%||Pass|
|Â||5-Year Dividend Growth > 10%||8.8%||Fail|
|Â||Total Score||Â||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Southern Copper last year, the miner has seen its score rise by a point. A stronger dividend and lower valuations are responsible for the improvement, but shares have struggled recently as fears about future copper demand have risen.
Along with Freeport-McMoRan Copper & Gold (NYS: FCX) , Southern Copper has some of the biggest copper reserves in the world. Among metals, gold and silver gain much more publicity, but smaller competitors like Ivanhoe Mines (NYS: IVN) and Taseko Mines (ASE: TGB) have also taken steps to boost production.
But just a few months ago, copper prices plummeted on concerns that growth in China would slow. With infrastructure projects in the emerging world supporting so much copper demand, a new global slowdown could hit Southern Copper hard.
Another issue comes from labor disputes. Southern Copper, Freeport, and Newmont Mining (NYS: NEM) have all seen some production cuts resulting from labor unrest. But at least at Southern Copper, which has avoided outright strikes, the disruptions didn't hurt quarterly results too much.
For Southern Copper to earn those last few points, it needs to keep profits high and pay down some of its debt. If prices can stay at lofty levels, then faster revenue growth could get the company even closer to a perfect 10.
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 Southern Copper 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. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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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