Is Tesla Motors 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 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.

Factor

What We Want to See

Actual

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.

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 the best investments from the rest.

Click here to add Tesla Motors 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. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. 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 August 19, 2011, at 3:25 AM, spectechinvest wrote:

    Good points. However the Tesla Model S is supposed to get better miles/charge on its highest end class of the model S up to 300 miles/charge.

    This will be the industry leader in range and other sedan amenities like luggage space and the size of its 17" touch screen which will be larger than the laptop screen I'm typing on!

    Another interesting angle to bring up about this company as a "stock" is that once TSLA starts getting a larger following and producing mainstream vehicles the stock will adjust accordingly via an increase in share price. However I am speculating that TSLA stock price will act more volatile than a normal auto stock and have larger gains than is typical for the industry. What i am trying to get across is that TSLA is actually a silicone valley technology stock more than an auto stock so it will have the potential for nosebleed high share prices like a "LinkedIn" or a "Netflix".

    Anyone covering TSLA as a stock MUST at least give this perspective a thought. Because if their cars are as successful as everyone is building them up to be and their owners love them as much as APPLE products. Then this stock must be considered as a possible candidate for technology sky high valuations with in the next 2-5 years.

    Any thoughts? I am a graduate student and have also written about model s design if you would like to read. I am not spamming just simple passing along information and thoughts i have gathered in a easy to read format.

    http://thespeculativetechinvestor.blogspot.com/2011/08/tesla...

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