Has First 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 and then decide whether First Solar (NASDAQ: FSLR  ) 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.
  • Moneymaking 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 First Solar.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year annual revenue growth > 15%

52.7%

Pass

 

1-Year revenue growth > 12%

8.8%

Fail

Margins

Gross margin > 35%

23.6%

Fail

 

Net margin > 15%

(22.5%)

Fail

Balance Sheet

Debt to equity < 50%

15.3%

Pass

 

Current ratio > 1.3

2.38

Pass

Opportunities

Return on equity > 15%

(17.7%)

Fail

Valuation

Normalized P/E < 20

18.19

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-Year dividend growth > 10%

0%

Fail

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at First Solar last year, the company has accelerated its score decline, falling two points after a single-point drop from 2010 to 2011. Yet the company is now losing money on a GAAP basis, and its stock has plunged more than 40% over the past year.

First Solar has been a leader in the solar-energy industry for a long time. With its low-cost advantage, the company was able to hold its rivals at bay even as competition got fierce. Yet despite starting the year off with a new record for efficiency, it still lags behind SunPower (NASDAQ: SPWR  ) in that all-important metric, raising concerns about First Solar's future as Trina Solar (NYSE: TSL  ) and Yingli Green Energy (NYSE: YGE  ) have managed to make progress on the cost front.

One solution that Fool contributor and solar expert Travis Hoium suggested earlier this year was the possibility of breaking First Solar into two pieces. Solar modules have become a commodity business, but project development is a big piece of First Solar's success and could put it into more direct competition with NRG Energy (NYSE: NRG  ) and other project specialists.

More recently, First Solar has put in a substantial rebound from its worst levels of the year. The optimism seems to reflect the inevitable thinning of the solar ranks, as weaker companies start to fail. First Solar's strong balance sheet gives it a huge competitive advantage that inspires customer confidence and should keep it in the running for a long time.

For First Solar to improve, it needs to do its best to survive the coming solar trade war with China and focus on its successful systems business. If it can do that, First Solar could be on the road to recovery.

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.

This article only scrapes the surface of what First Solar's been up to lately. To get a more in-depth perspective on whether First Solar is a buy after its precipitous drop over the past 12 months, along with continuing updates and guidance on the company whenever news breaks, be sure to read our premium report on the company. It details every must-know side of this stock. To get started, just click here now.

Click here to add First Solar to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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