Has Newmont Mining Become the Perfect Stock?
Apr 2nd 2012 10:14AM
Updated Apr 2nd 2012 2:12PM
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 Newmont Mining (NYS: NEM) 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 Newmont Mining.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||16.2%||Pass|
|1-Year Revenue Growth > 12%||8.6%||Fail|
|Margins||Gross Margin > 35%||61.1%||Pass|
|Net Margin > 15%||3.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||27.3%||Pass|
|Current Ratio > 1.3||1.37||Pass|
|Opportunities||Return on Equity > 15%||7.0%||Fail|
|Valuation||Normalized P/E < 20||10.25||Pass|
|Dividends||Current Yield > 2%||2.7%||Pass|
|5-Year Dividend Growth > 10%||20.1%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Newmont Mining last year, the company has dropped a point. The miner picked up points on its big dividend increase, but drops in returns on equity and net margins weighed on its score.
Clearly, as a major gold producer, Newmont has reaped the benefits of higher gold prices. Yet after gold fell back from highs above $1,900 per ounce, mining stocks have suffered inordinately. While big stocks like Barrick (NYS: ABX) and Newmont have held up fairly well, smaller Agnico-Eagle (NYS: AEM) has seen much larger declines, and tiny producer Primero Mining (NYS: PPP) has gotten hammered in the decline. Although Agnico-Eagle and Primero jumped more during gold's bull run, Newmont's recent behavior shows the value of investing with big industry players.
The advantage that Newmont has is that its production is pretty well locked in. Although it makes acquisitions to pick up new reserves, Newmont largely wins or loses based on spot gold prices. That's one reason why, along with silver miner Hecla (NYS: HL) , Newmont pegs its dividend payout directly to the price of gold. Gold's advance has been essential to providing the rewards that shareholders have received, but a decline could send that payout back down again.
To achieve perfection, Newmont needs a simple thing: rising gold prices. If $2,000 gold comes, then Newmont could see the growth it would need to boost its margins and sales growth back up and get those final points.
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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Click here to add Newmont Mining to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Primero Mining. 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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