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 Power-One (Nasdaq: PWER ) 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 Power-One.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||31.3%||Pass|
|1-Year Revenue Growth > 12%||35.5%||Pass|
|Margins||Gross Margin > 35%||34.9%||Fail|
|Net Margin > 15%||14.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||9.3%||Pass|
|Current Ratio > 1.3||2.61||Pass|
|Opportunities||Return on Equity > 15%||49.2%||Pass|
|Valuation||Normalized P/E < 20||3.89||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Power-One last year, the power-inverter maker dropped a point as its gross margins slipped modestly. Despite continued revenue growth, though, the company has seen its shares plummet as the health of the entire solar industry has suffered in the past year.
Power-One depends on alternative energy for its success. Making inverters that change the direct-current electricity that wind turbines and solar panels produce into the alternating-current electricity that power grids deliver for home use, Power-One's equipment is part of the up-front investment that alternative-energy projects require.
Unfortunately, the sun hasn't been shining on the solar industry lately. Troubles in Europe have called into question whether governments there will continue high subsidy levels, threatening LDK Solar (NYSE: LDK ) , JA Solar (Nasdaq: JASO ) , and Trina Solar (NYSE: TSL ) , which have high exposure to the European market.
At the same time, competition has gotten fierce among inverter makers. Companies including Satcon Technology and American Superconductor (Nasdaq: AMSC ) are fighting for business, and although the inverter industry still has potential to grow, Power-One can't ignore the threats those competitors represent.
For Power-One to get back on the upward track, a resolution to Europe's troubles and clarity on solar spending going forward would help. If it can get that along with sustained high prices for oil, Power-One could get closer to perfection in the years ahead.
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."