Has Solazyme 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 Solazyme (NASDAQ: SZYM  ) 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 Solazyme.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

162.9%*

Pass

 

1-year revenue growth > 12%

13.2%

Pass

Margins

Gross margin > 35%

88%

Pass

 

Net margin > 15%

(188.5%)

Fail

Balance sheet

Debt to equity < 50%

8.2%

Pass

 

Current ratio > 1.3

6.63

Pass

Opportunities

Return on equity > 15%

(39.2%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes. * Four-year growth rate.

Since we looked at Solazyme last year, the company has picked up a point, as revenue growth picked up a bit in 2012. The stock, though, plunged by more than half over the past year.

Solazyme has always been a promising company, with its algae-based renewable biofuel offering an alternative to regular fossil fuels. Yet as unconventional drilling techniques have dramatically increased supplies of oil and natural gas, major energy producers are looking more at exploiting newly found reserves than at supporting the development of innovative renewable alternatives. That has left Solazyme and its peers with a big challenge to face.

But Solazyme has its sights set on more than just renewable energy applications. The company believes that its nutritional oils can replace more expensive and less healthy oils that currently dominate food production, opening the door to a potential revolution in nutrition. That two-pronged approach of attacking both energy and consumer applications has worked well for rival FutureFuel (NYSE: FF  ) , which has developed its biodiesel business while also producing custom chemicals for use in agricultural and personal-care products. Amyris (NASDAQ: AMRS  ) has also switched its focus from sustainable diesel and jet fuel production toward high-value chemicals for use in tire production and certain plastics, as well as cosmetics and other consumer products, and by doing so, it hopes to shore up its finances with more profitable business lines.

Unfortunately, Solazyme sees itself remaining unprofitable for several years. Extensive upfront capital costs represent just the beginning of massive expenditures it will need to get to full production.

For Solazyme to improve, it needs to make the leap to profitability. Until that happens, Solazyme will have difficulty making any progress toward 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.

There are many different ways to play the energy sector, and The Motley Fool's analysts have uncovered an under-the-radar company that's dominating its industry. To get its name and detailed analysis of the company, check out the special free report: "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this stock  before the market does. Click here to access your report -- it's totally free.

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


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