Has American Superconductor Become 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 American Superconductor (Nasdaq: AMSC  ) 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 American Superconductor.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.0% Fail
  1-Year Revenue Growth > 12% (73.3%) Fail
Margins Gross Margin > 35% (8.3%) Fail
  Net Margin > 15% (178.8%) Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 1.66 Pass
Opportunities Return on Equity > 15% (59.8%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at American Superconductor last year, the company has fallen by four points. The huge problem with its major customer has spiraled into a catastrophe that has lopped off 50% of its share value in the past year and threatens its viability going forward.

Like big conglomerates General Electric (NYSE: GE  ) and Siemens (NYSE: SI  ) , American Superconductor plays an important role in the renewable energy industry. The company highlights two main focus areas: energy network optimization and wind turbine manufacturing. But unlike GE and Siemens, which have the capacity to handle manufacturing in-house, American Superconductor instead focuses on design work and other intellectual property, working directly with manufacturers to make products that fit specific needs.

The problem that American Superconductor faces is that it relied too heavily on a single customer and now finds itself stuck in a huge dispute. Sinovel was the company's largest customer, but early last year, it started refusing shipments and failed to pay for previous purchases. Litigation ensued, with American Superconductor alleging that Sinovel simply stole its intellectual property, but so far, the fight hasn't produced any results.

American Superconductor is trying to salvage its business by turning to other products, such as its utility-scale power-inverter systems. But competitors Power-One (Nasdaq: PWER  ) , Enphase Energy (Nasdaq: ENPH  ) , and Satcon Technology already have their feet in the door there, which will make it hard to generate sales quickly.

To get its mojo back, American Superconductor needs to win its dispute against Sinovel. With that unlikely in the near term, it will take a while before American Superconductor has any chance of becoming a perfect stock.

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 out the best investments from the rest.

American Superconductor isn't the only energy play out there. We've found another stock that could perform a lot better. 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 American Superconductor to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Power-One. 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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