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 FuelCell Energy
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 FuelCell Energy.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 23.7% | Pass |
| 1-Year Revenue Growth > 12% | 2.9% | Fail | |
| Margins | Gross Margin > 35% | (18.6%) | Fail |
| Net Margin > 15% | (62.4%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 6.6% | Pass |
| Current Ratio > 1.3 | 1.93 | Pass | |
| Opportunities | Return on Equity > 15% | (57%) | Fail |
| Valuation | Normalized P/E < 20 | NM | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; FuelCell had negative earnings in the period and therefore fails valuation test. Total score = number of passes.
FuelCell only manages to rack up three points. But while most of the measures here are backward-looking, FuelCell has most of its potential ahead of it -- and could easily vault toward perfection with a few well-timed successes.
As an alternative energy company focusing on, well, fuel cells, FuelCell has seen its share of ups and downs. Just as fellow fuel-cell companies Ballard Power
Recently, though, enthusiasm for fuel cells has started rising again. In December, FuelCell reported that its order backlog was on the rise, offsetting the negative impact of its earnings miss.
But with gigantic competitors like General Electric
Although it undoubtedly has a chance to produce strong gains if it succeeds, FuelCell is far from perfect right now. Speculators might feel comfortable taking a flyer on the stock, but more conservative investors should steer clear at least for a while.
Keep searching
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 FuelCell Energy 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.
