Is Power-One the Perfect Stock?

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.

Factor

What We Want to See

Actual

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.

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.

Click here to add Power-One 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 in this article. First Solar and Suntech Power are Motley Fool Rule Breakers choices. The Fool has a bull call spread position on Cisco Systems. The Fool owns shares of Power-One. 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.


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  • Report this Comment On December 08, 2010, at 9:11 AM, tradeking44 wrote:

    So Motley, I enjoyed your "is power-one the perfect stock" article and I just had to find out how my stock of choice, JA Solar, stacks up using the same template. And yes, this is not an apples to apples, just a comparison using the same criteria.

    Let's see...

    PWER:

    Pass or Fail?

    5-Year Annual Revenue Growth > 15% 25.1% pass

    1-Year Revenue Growth > 12% 96.3% pass

    Gross Margin > 35% 36.6% pass

    Net Margin > 15% 12.1% fail

    Debt to Equity < 50% 15.4% pass

    Current Ratio > 1.3 1.85 pass

    Return on Equity > 15% 50.5% pass

    Normalized P/E < 20 11.18 pass

    Current Dividend Yield > 2% 0% fail

    5-Year Dividend Growth > 10% 0% fail

    JASO:

    Pass or Fail?

    5-Year Annual Revenue Growth > 15% 15.76% pass

    1-Year Revenue Growth > 12% 211% pass

    Gross Margin > 35% 22% fail

    Net Margin > 15% 12.3% fail

    Debt to Equity < 50% 45.91% pass

    Current Ratio > 1.3 2.60 pass

    Return on Equity > 15% 21.3% pass

    Normalized P/E < 20 7.01 pass

    Current Dividend Yield > 2% 0% fail

    5-Year Dividend Growth > 10% 0% fail

    So what is the result? Power-One's score of 7 is quite impressive. JASO score was a 6, but indeed, at least on the surface, is every bit the "perfect solar" stock that PWER is, with a much LOWER PEG, .31 for JASO vs .62 for PWER. As you probably are already aware, 92% of companies with PEG ratios of less than 1 beat the market over three years and that's a theme I'd like to see in tandem.

    Now let's look at PE's.

    Current PE: JASO 7.08 / PE Fwd 4.83

    Average S&P PE: 15-20

    Average PE: Chinese Solar specific: 13

    Average PE: Claymore/MAC ETF (TAN)solar stocks: 15

    Average PE multiple industry average per latest Standard and Poor's report: 7

    Some of these PE's seemed high, so I went with the lowest, most conservative, just for the sake of argument.

    2010: $1.32 EPS x 7 = $9.24

    2011: 1.41 x 7 = $9.87

    Deep, drawn out analysis makes you wonder about the current PPS doesn't it. We know Eurozone fears are nothing new, and economies have to raise rates to control inflation, so what's really the problem lately? All of these facts were known when JASO was trading at $10. Now, many solars are 30%+ lower from recent 52wk highs, a rather dubious turn of events, albeit a likely healthy pullback.

    Indeed, it does look like the global economy is about to kick it into a higher gear, and with that, energy demand will undoubtedly pick up, think $100 oil. Tax deal looks like it's going to get done. Businesses will get another shot in the arm, investors will benefit, and families will have more money to spend. JASO in particular, enjoys tremendous support in China, and we know the fundamentals are there, JASO has plenty of cash, is extremely undervalued, and has one of the cleanest balance sheets around.

    I would love to hear what readers think of the comparison. Alternative energy has plenty of love to go around. Call me crazy, but I think it's only a matter of time before "the powers that be" join longs for the ride back up.

    http://www.dailyfinance.com/story/whats-...

    http://www.guggenheimfunds.com/etf/fund/...

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