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 Solazyme (Nasdaq: SZYM ) 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 Solazyme.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||248.2%*||Pass|
|1-Year Revenue Growth > 12%||2.6%||Fail|
|Margins||Gross Margin > 35%||93.8%||Pass|
|Net Margin > 15%||(138.3%)||Fail|
|Balance Sheet||Debt to Equity < 50%||8.4%||Pass|
|Current Ratio > 1.3||8.86||Pass|
|Opportunities||Return on Equity > 15%||(33.8%)||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. * Three-year growth rate.
With only four points, Solazyme isn't close to perfection just yet. The biofuel maker is on the cutting edge of an interesting technology, but it has a ways to go before becoming profitable.
The biofuels industry has gotten extremely popular in recent years. As oil prices have risen, the possibilities for alternative fuels have become more feasible. Already, Solazyme is working with Chevron (NYSE: CVX ) on biodiesel technology, while Dow Chemical (NYSE: DOW ) has also signed on to develop oils to act as insulating fluids for electrical transformers.
But what truly sets Solazyme apart from its competitors are its non-energy-related oil offerings. The company has a line of beauty products, which has drawn interest from Unilever (NYSE: UL ) as a strategic investor, as well as specifically designed oils for various food products. With the higher margins available from these lines of business, Solazyme could become profitable a lot sooner than it would otherwise.
Earlier this week, Solazyme made an interesting deal, announcing a joint venture for a Brazilian facility to produce renewable oils with Bunge (NYSE: BG ) . By tying itself to yet another big partner, Solazyme will be able to provide enough supply to meet rising demand.
For Solazyme to keep improving, it needs to take advantage of these extensive resources to come up with practical solutions with valuable economic uses. Eventually -- and if energy prices stay high -- Solazyme should be able to boost its volume sufficiently to reach profitability. From there, the sky's the limit for Solazyme.
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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