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 ReneSola (NYSE: SOL ) 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 ReneSola.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||48.2%||Pass|
|1-Year Revenue Growth > 12%||(38.3%)||Fail|
|Margins||Gross Margin > 35%||(1.6%)||Fail|
|Net Margin > 15%||(9.9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||162.5%||Fail|
|Current Ratio > 1.3||0.79||Fail|
|Opportunities||Return on Equity > 15%||(14.1%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||1 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at ReneSola last year, the company has seen its score plunge by four full points. The solar company has had a staggering drop in revenue and has turned substantial profits into huge losses, and its shares have dropped more than 75% in the past year as a result.
The solar industry is going through extremely tough times. Even among top companies First Solar (Nasdaq: FSLR ) and SunPower (Nasdaq: SPWR ) , investors are trying to figure out how solar players will survive intense competition. First Solar might fare better if it were to split up, while even fairly good earnings for SunPower weren't enough to dispel fears of more bad times ahead.
The problem is especially bad for many Chinese manufacturers. Despite negative profit margins, Trina Solar (NYSE: TSL ) and Yingli Green Energy (NYSE: YGE ) both continue to boost their sales. Yet ReneSola even has negative gross margins, meaning it loses money just in producing its goods. That's clearly not a sustainable state of affairs for the company.
With huge amounts of debt, an inability to be profitable, and worsening operating conditions as subsidies start to disappear, it's hard to see how ReneSola will survive. Even among its peers, ReneSola's particular weakness stands out. Fool contributor and solar specialist Travis Hoium believes the company could well be one of solar's impending failures, and there's little to contradict his analysis.
For ReneSola to improve, it desperately needs better pricing for its products. The only hope of that happening is if it can outlast competitors that go out of business and reduce the current supply overhang. If that doesn't happen, ReneSola won't be in any position to become a perfect stock in its current form.
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.
If you think energy is the place to be, we've got a stock idea that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time, so click here today.
Click here to add ReneSola to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.