Is Maxwell Technologies Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Maxwell Technologies (MXWL) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Maxwell Technologies' story, and we'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Maxwell Technologies' key statistics:

MXWL Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q1 2011.

MXWL Return on Equity (TTM) data by YCharts

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Maxwell Technologies has done an excellent job at improving its fundamentals over the past three years, and its progress earns it a strong five out of seven passing grades on our assessment today. The company's current weaknesses -- negative free cash flow and rising debt-to-equity levels -- are both easily addressable with the right strategy, and it's worth noting that Maxwell's free cash flow had actually surpassed its net income in 2013 before turning lower heading into this year. Can Maxwell reverse its free cash flow declines and earn a perfect score next year? Let's dig deeper to find out.

This has been a good year for Maxwell shareholders, who have not had it easy for the past three years. Shares have nearly doubled in 2014 after languishing through the previous two years, with most of Maxwell's gains occurring in just a few trading days in March. The company announced the expansion of its ultracapacitor modules to medium-duty trucks, which coincided with a positive analyst note from Piper Jaffray that doubled Maxwell's price target to $21, which still offers nearly 50% upside from recent prices. The firm has since upped  its price target to $25.

However, Maxwell's near-term progress remains somewhat modest for a company with such high expectations. First-quarter results showed a slight decrease in revenue  from the year-ago quarter, but the company did improve from a narrow loss to a narrowly positive bottom line. CFO Kevin Royal chose to highlight sequential improvements  instead of year-over-year growth during the quarterly earnings call, a clever diversionary tactic considering the fact that Maxwell's fourth quarter  saw one of its worst  performances in years, with revenue slipping 12% year-over-year and the bottom line swinging from a $0.12 adjusted profit per share to an adjusted loss of $0.05 per share.

On the other hand, Maxwell's success remains firmly tied to its future initiatives, which for the moment seem to be driven (pardon the pun) by Chinese electric-vehicle manufacturers. Maxwell executives highlighted Chinese electric-bus opportunities -- about 80,000 buses were manufactured in China last year, of which roughly 10% were electric -- as well as pending auto design wins and electric-rail system installations as major sources of growth this year. The company already has a partnership with Pugeot and passenger-rail design wins in Korea and with ABB's (ABBN.Y -0.09%) light rail system in Philadelphia, and its largest customer is Chinese bus manufacturer Yutong, so all of these projections have a firm foundation from which to launch.

Maxwell also entered into partnership with glassmaking giant Corning (GLW -0.41%) earlier this year  to develop better capacitors and higher-voltage products. This is likely to be far more valuable to capacitor specialist Maxwell, which has less than $200 million in trailing 12-month revenue, than it will be to Corning, which has made more than $8 billion in revenue over the past four quarters. Maxwell's best opportunities, it seems, lie ahead, and a perfect score appears well within reach.

Putting the pieces together
Today, Maxwell Technologies has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.