Is Clean Energy Fuels the Perfect Stock?

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 Clean Energy Fuels (Nasdaq: CLNE  ) 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 Clean Energy Fuels.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 22.1% Pass
  1-Year Revenue Growth > 12% 61.1% Pass
Margins Gross Margin > 35% 33.0% Fail
  Net Margin > 15% (1.2%) Fail
Balance Sheet Debt to Equity < 50% 15.5% Pass
  Current Ratio > 1.3 1.67 Pass
Opportunities Return on Equity > 15% (0.8%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   4 out of 9

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just four points, Clean Energy Fuels isn't close to perfection. But the young energy company has a lot of potential, and with a boost from recent government initiatives, that potential could turn into profit in the years to come.

In a world with $100 oil, companies like Clean Energy Fuels have never had a better environment in which to take off. Clean Energy Fuels is tied into a key element of the nation's energy policy, setting up a network of natural gas fueling stations to encourage greater use of natural gas-burning vehicles.

The company knows, however, that it needs to work with others to make its plan a reality. With a partnership with truck-stop operator Pilot Flying J, the company could have stations around the country soon. And Clean Energy Fuels recently signed an agreement with UPS (NYSE: UPS  ) to fuel a small fleet of liquefied natural gas trucks in Las Vegas.

The problem for investors is that small companies have to resort to desperate measures when raising capital. Like Westport Innovations (Nasdaq: WPRT  ) and Fuel Systems Solutions (Nasdaq: FSYS  ) , Clean Energy Fuels has to make secondary offerings of stock to raise cash from time to time, diluting existing shareholders. That doesn't make the stock a bad investment, but it does potentially limit its upside.

After a speech from President Obama earlier this month, Clean Energy Fuels is riding high on optimism about alternative fuels. But this isn't the first time the country has committed to moving away from gasoline only to reverse course back to the status quo. Until natural gas becomes a sure thing, Clean Energy Fuels won't be the perfect stock.

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 Clean Energy Fuels 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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Westport Innovations is a Motley Fool Stock Advisor selection. The Fool owns shares of United Parcel Service. 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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  • Report this Comment On April 26, 2011, at 11:34 AM, buffalonate wrote:

    I bought Clean Energy Fuels at around $12 right before their earnings announcement because I thought they would finally be profitable. i was right and the stock has soared since. I got out at around $16.50 because I thought the stock had rallied way too much. The rally was mostly due to speculation of a natural gas energy bill possibly being passed. This company is doubled revenue in the last year and is a really great investment longterm but I wouldn't buy into it again unless it dropped into the $13-14 range. The Republicans are pushing a stripped down natural gas bill that has a lot of cosigners and will likely pass as some point. If they start working on the bill seriously I would buy into Clean Energy at whatever price because the speculators will send this stock soaring if the bill passes.

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