Has Trina Solar 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 Trina Solar (NYSE: TSL  ) 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 Trina Solar.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 66.9% Pass
  1-Year Revenue Growth > 12% (10.8%) Fail
Margins Gross Margin > 35% 10.9% Fail
  Net Margin > 15% (6.2%) Fail
Balance Sheet Debt to Equity < 50% 102.2% Fail
  Current Ratio > 1.3 1.59 Pass
Opportunities Return on Equity > 15% (9.9%) 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 Trina Solar last year, the company has gone almost completely dark, falling by a whopping five points. With shares down around 70% in the past year, the solar company's reversal of fortune has been abrupt and severe.

For years, Trina enjoyed the benefits of China's solar market, as the Chinese government provided useful support to the industry. What that did, though, was to encourage a huge number of Chinese solar companies to enter the business, and now, the glut of manufacturing capacity has pushed prices down and created big losses for much of the industry. LDK Solar (NYSE: LDK  ) and Renesola (NYSE: SOL  ) even have negative gross margins, making them unlikely candidates to survive the coming shakeout.

But not all the news has been bad for Trina. Last month, Italy and Germany both backed off on measures to cut subsidies that would have hit Trina and competitors Suntech Power, First Solar (Nasdaq: FSLR  ) , and Yingli Green Energy hard. Yet Germany still followed up two weeks ago with alternate subsidy cuts.

Looking forward, along with SunPower (Nasdaq: SPWR  ) , Trina has the advantage of its products having relatively high efficiency. With that being an ever-more important aspect of solar modules, Trina could eventually survive the industry shakeout in far better shape than some of its competitors.

For Trina to improve, it needs to survive long enough to outlast weaker companies in the industry. Once it does that, Trina will be in a better position to make the most of the many solar opportunities around the world.

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 the best investments from the rest.

If you like energy stocks, you may want a different option than Trina Solar. We've got another stock you should also look at more closely. 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 Trina Solar 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. 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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