Has SunPower 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, and then decide if SunPower (Nasdaq: SPWR  ) 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 SunPower.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

38.9%

Pass

 

One-year revenue growth > 12%

(6.8%)

Fail

Margins

Gross margin > 35%

10.1%

Fail

 

Net margin > 15%

(26%)

Fail

Balance sheet

Debt to equity < 50%

71.9%

Fail

 

Current ratio > 1.3

2.47

Pass

Opportunities

Return on equity > 15%

(46.2%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

Five-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 SunPower last year, the company has dropped a point. But big net losses have been a lot more severe than a single-point drop would suggest, and the stock has plunged roughly 50% in the past year.

The solar industry has had a very tough year. Oversupply of solar modules has caused prices to plunge, and with them, margins and profits have largely disappeared throughout the industry. In particular, Chinese companies have faced huge obstacles, with Trina Solar (NYSE: TSL  ) having struggled even to keep gross margins positive, while ReneSola (NYSE: SOL  ) has negative gross margins.

But SunPower has some things going for it. First and foremost, it has the most efficient modules, giving it a huge competitive advantage. Moreover, thanks to a strategic investment from oil giant Total (NYSE: TOT  ) , SunPower has financial resources at its disposal that many of its peers lack.

Moreover, the solar market seems to be searching for a bottom, at least for U.S. companies. First Solar (Nasdaq: FSLR  ) is hoping to use its superior systems business to carve out a niche for itself, but SunPower's efficiency advantage should allow it to reign over the residential market. SunPower's programs allowing homeowners to install solar panels at little or no upfront cost should spur demand in the long run.

For SunPower to recover fully, it needs to outlast competitors that should eventually collapse under their own weight. Until then, though, SunPower may face an uphill battle in navigating the tough competitive environment and finding ways to get profitable.

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.

SunPower investors need to know everything they can learn about rival First Solar. Fortunately, we've got all the latest about the solar industry in the Fool's premium report on First Solar. For in-depth analysis and free updates, don't wait another minute -- click here and get in the know today.

Click here to add SunPower 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. The Motley Fool owns shares of Total. 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. Try any of our Foolish newsletter services free for 30 days.


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