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 Tesla Motors (Nasdaq: TSLA ) 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 Tesla Motors.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||NM||NM|
|1-Year Revenue Growth > 12%||54.2%||Pass|
|Margins||Gross Margin > 35%||32.7%||Fail|
|Net Margin > 15%||(111.1%)||Fail|
|Balance Sheet||Debt to Equity < 50%||38.7%||Pass|
|Current Ratio > 1.3||3.01||Pass|
|Opportunities||Return on Equity > 15%||(103.6%)||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||3 out of 8|
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Tesla had no revenue in 2006 and negative earnings in the past 12 months. Total score = number of passes.
With only three points, Tesla doesn't look like it's going anywhere fast. The key to the carmaker's success depends on whether electric vehicle demand picks up in the years to come.
Even before Tesla came public last year, the company had a lot of investors paying attention. That's because in a world of boring, utilitarian hybrid cars, Tesla came up with its sporty electric Roadster, which stood out from the crowd. That was enough to get Toyota (NYSE: TM ) to pony up a $50 million investment in Tesla before the IPO.
A year later, it's getting clearer that the company won't compete on its own against Ford (NYSE: F ) , Honda (NYSE: HMC ) , or General Motors (NYSE: GM ) . What it can do, though, is contribute its technology to go up against those giants with the help of partners like Toyota.
Things will change, though, when Tesla starts producing its much-anticipated Model S next year. It will lack the range of the Roadster but stand up well against competitors like the Nissan Leaf. The Model S rollout should give tangible evidence of whether Tesla is an automaker in its own right or merely a supplier to existing producers.
Right now, Tesla is far from profitability and still trading on its future potential. Even if its new model does well, it'll take a long drive before Tesla reaches perfection.
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 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.