Has Vale Become the Perfect Stock?
Jun 13th 2012 11:30AM
Updated Jun 13th 2012 11:32AM
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 Vale (NYS: VALE) 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 Vale.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||13.5%||Fail|
|1-Year Revenue Growth > 12%||8.8%||Fail|
|Margins||Gross Margin > 35%||59.0%||Pass|
|Net Margin > 15%||33.0%||Pass|
|Balance Sheet||Debt to Equity < 50%||32.3%||Pass|
|Current Ratio > 1.3||2.05||Pass|
|Opportunities||Return on Equity > 15%||23.4%||Pass|
|Valuation||Normalized P/E < 20||7.66||Pass|
|Dividends||Current Yield > 2%||6.4%||Pass|
|5-Year Dividend Growth > 10%||17.9%||Pass|
|Total Score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Vale last year, the company has dropped a point. Slowing revenue growth not only hurt the mining company's score but led to a 40% plunge in Vale's share price as well.
Across the industry, miners have gotten hurt by slowing economic growth in China and throughout the emerging-market world. BHP Billiton (NYS: BHP) and Rio Tinto (NYS: RIO) , which along with Vale provide huge amounts of iron ore to the Chinese market, have also seen declines in their shares as Chinese growth comes more into question. Even in the U.S., Cliffs Natural Resources (NYS: CLF) has suffered from lower iron-ore prices.
But Vale faces unique challenges. It's facing higher tax rates, and despite its relatively small exposure to Europe, what's happening there has had a big effect on the entire global mining market. Investors may also be leery of what's happening in nearby Argentina, where nationalization of oil reserves has reawakened fears of a return to the less pro-capitalist Latin America of past decades. The decline in Petrobras (NYS: PBR) certainly seems to be related to Argentina's move, and political stability in emerging-market nations has always been difficult to gauge.
Moreover, after a huge run-up in the Brazilian currency, the government has only recently started pushing down the real compared to the dollar. In the long run, that may help Vale be more competitive, but it has also contributed to the drop in Vale shares as measured in U.S. dollars.
For Vale to move back in the right direction, it needs only one thing: a return to faster growth. If Brazil and China can bounce off the bottom and get back to their high-growth ways, then Vale could well get a perfect 10 in the next few years.
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.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Petroleo Brasileiro. 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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