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 A-Power Energy Generation Systems
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 A-Power Energy Generation Systems.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 36% | Pass |
| 1-Year Revenue Growth > 12% | 22.0% | Pass | |
| Margins | Gross Margin > 35% | 18.6% | Fail |
| Net Margin > 15% | 4.9% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 18% | Pass |
| Current Ratio > 1.3 | 2.02 | Pass | |
| Opportunities | Return on Equity > 15% | 5.7% | Fail |
| Valuation | Normalized P/E < 20 | 3.90 | Pass |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 5 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With five points, A-Power finishes in the middle of the pack. The company is trying to cash in on prospects in wind energy, but its stock is vulnerable to a slowdown in Asian investment.
As its name suggests, A-Power is a player in the energy generation business, with a current emphasis on wind turbines. In that space, it goes up against much larger companies Siemens
Like many wind players, including Broadwind Energy
More recently, A-Power signed two small biomass power plant contracts, but that won't be enough to turn the tide. Combined with a contract it got for a Chinese hydropower contract late last year, A-Power should have enough work for the foreseeable future.
The long-term question, though, is whether A-Power will pick a direction and stick to it. So far, it has flitted across business strategies almost at will, making it hard to see where the company is going. Until the company truly finds its niche, A-Power won't be able to make the leap to become a 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.
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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.
