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 Capstone Turbine (Nasdaq: CPST ) 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 Capstone Turbine.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||32.6%||Pass|
|1-Year Revenue Growth > 12%||46.7%||Pass|
|Margins||Gross Margin > 35%||2.1%||Fail|
|Net Margin > 15%||(39.1%)||Fail|
|Balance Sheet||Debt to Equity < 50%||35.1%||Pass|
|Current Ratio > 1.3||1.59||Pass|
|Opportunities||Return on Equity > 15%||(91%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Capstone Turbine last year, the company has kept the same four-point score. But the microturbine maker has made some big strides toward longer-term success.
Capstone is a player in the alternative energy space with its low-emission microturbines. Originally, the company saw businesses using its products to generate their own power, reducing or eliminating their dependence on the electrical power grid and the attendant price spikes that occurred at various points over the past decade.
But where Capstone sees itself having the most potential for success is in the oil patch. With shale oil plays arising in areas that don't have access to electricity, microturbines are a natural way to generate the power that oil and gas exploration and production companies need. The company is targeting the Eagle Ford shale play, where Chesapeake Energy (NYSE: CHK ) and EOG Resources (NYSE: EOG ) have extensive assets. Capstone has already announced orders for a total of 64 microturbines in the Eagle Ford since August 2010.
With the company posting a small profit in its most recent quarter, that strategy seems to be working well. Yet the best hope for Capstone may eventually be a takeover bid from larger players in the space. With General Electric (NYSE: GE ) and Caterpillar (NYSE: CAT ) both vying for dominance in power generation equipment and alternative energy, either company could gain a strategic advantage over the other by adding Capstone's assets to its overall portfolio.
That said, hoping for a takeover is never the ideal investing strategy. If Capstone can use its newfound success to build more business in oil- and gas-producing areas, it could thrive in the current environment. But the company needs to stay profitable if it wants to move 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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