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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Power-One (Nasdaq: PWER ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Power-One.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||25.1%||pass|
|1-Year Revenue Growth > 12%||96.3%||pass|
|Margins||Gross Margin > 35%||36.6%||pass|
|Net Margin > 15%||12.1%||fail|
|Balance Sheet||Debt to Equity < 50%||15.4%||pass|
|Current Ratio > 1.3||1.85||pass|
|Opportunities||Return on Equity > 15%||50.5%||pass|
|Valuation||Normalized P/E < 20||11.18||pass|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Power-One's score of 7 is quite impressive. What's even more impressive, though, are the returns this upstart company has given its investors lately.
With huge interest in solar energy in recent years, Power-One found itself in the right place at the right time. The company makes power inverters, which help convert electricity from direct current (DC) to alternating current (AC) and vice versa.
That may sound simple, but many companies need Power-One's services. For industrial purposes, customers like Cisco Systems (Nasdaq: CSCO ) need to be able to take the AC power they get from utilities and convert it into DC power for their own purposes. But for solar power, the need goes the other direction; panels produce DC power, but to feed it into the grid, it needs to be converted to AC.
Power-One knows its success is linked to panel producers. It recently opened a factory in Arizona, close to where Tempe-based First Solar (Nasdaq: FSLR ) is headquartered as well as by production facilities from Suntech Power (NYSE: STP ) . As the industry grows, Power-One hopes to grow along with it.
From a fundamental perspective, Power-One has everything going for it right now. It has reasonable debt levels, strong growth, and decent margins, yet it trades at a fairly attractive earnings multiple. This young company has a lot of growing to do, but in an exciting industry, Power-One has a chance at perfection in the future.
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.
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