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 A123 Systems (Nasdaq: AONE ) 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 A123 Systems.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||28.1%||Pass|
|1-year revenue growth > 12%||10%||Fail|
|Margins||Gross margin > 35%||(43%)||Fail|
|Net margin > 15%||(189.5%)||Fail|
|Balance sheet||Debt to equity < 50%||42.4%||Pass|
|Current ratio > 1.3||3.69||Pass|
|Opportunities||Return on equity > 15%||(44.5%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Total Score||3 out of 9|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful because of negative earnings. Total score = number of passes.
With only three points, A123 isn't powering up a strong score. But the company has just seen what could eventually prove to be a game-changing deal in the auto industry.
A123 is one of several companies moving battery technology forward, with applications including electric vehicles and alternative energy storage. Like Ener1 and Valence Technology (Nasdaq: VLNC ) , the industry has taken a bit of a breather from its strong growth in recent years as companies wait for big manufacturers to make their moves.
The catalyst for a move may come from a current government proposal to require fleet averages to rise above 56 miles per gallon by 2025. Although car makers such as Toyota (NYSE: TM ) and Ford (NYSE: F ) might be able to get there based on conventional engines, the rise of Tesla Motors (Nasdaq: TSLA ) suggests that electric vehicles could also play a big role in reaching new heights of fuel efficiency.
Late last week, A123 announced it signed a contract with General Motors (NYSE: GM ) to provide its nanophosphate lithium-ion batteries for future electric vehicles. You won't find them in the current Volt offering, but if the future for cars is electric, then A123 may just have won the pole position going forward.
A123's past numbers don't look very energized. But if the GM deal opens the floodgates to more offers, then the future could look very bright for A123.
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.