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 ReneSola (NYSE: SOL ) 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 ReneSola.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||188.4%||Pass|
|1-Year Revenue Growth > 12%||117.6%||Pass|
|Margins||Gross Margin > 35%||31.1%||Fail|
|Net Margin > 15%||15.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||112.9%||Fail|
|Current Ratio > 1.3||1.09||Fail|
|Opportunities||Return on Equity > 15%||39.1%||Pass|
|Valuation||Normalized P/E < 20||4.34||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
ReneSola doesn't soak up the sun with a midrange score of 5. With the solar company having come so far so fast, its next step is to demonstrate that its recent profit explosion isn't a fluke.
Two years ago, ReneSola set an ambitious goal: develop one gigawatt of solar module capacity by 2012 at an affordable cost of $1 per watt. The company quickly moved to expand, picking up a company called Dynamic Green Energy that it believed would get the company halfway to its goal by the end of 2009. Perhaps more importantly for shareholders, who've been impressed with the company's progress thus far, ReneSola's stock has more than doubled in the past two years.
But ReneSola certainly doesn't have the industry to itself. Coming out of the recession, high oil prices have sparked new interest in solar. SunTech Power (NYSE: STP ) , LDK Solar (NYSE: LDK ) , and First Solar (Nasdaq: FSLR ) have all made recent strategic moves to bolster their positions in the industry.
Now, solar stocks have gotten ridiculously cheap, as ReneSola's rock-bottom valuation suggests. Concerns about potentially disappearing European subsidies threaten the industry, but an about-face for renewable energy seems unlikely. With returns on equity that put most of its competitors -- including JA Solar (Nasdaq: JASO ) and SunPower (Nasdaq: SPWRA ) -- to shame, ReneSola could become the perfect stock in time.
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 ReneSola 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.