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, then decide if 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.
  • 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 First Solar.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 95.2% Pass
  1-Year Revenue Growth > 12% 4.7% Fail
Margins Gross Margin > 35% 42.6% Pass
  Net Margin > 15% 19.5% Pass
Balance Sheet Debt to Equity < 50% 15.1% Pass
  Current Ratio > 1.3 3.25 Pass
Opportunities Return on Equity > 15% 14.5% Fail
Valuation Normalized P/E < 20 9.58 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   6 out of 10

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

Since we looked at First Solar last year, the solar giant has dropped a point. Although the company's valuation has gotten a lot more attractive, slowing growth and falling returns on equity have taken their toll on First Solar's score.

Not so long ago, the solar industry seemed like it had limitless potential. But lately, falling prices and uncertainty about the status of government subsidies going forward have put pressure on solar manufacturers, causing the industry to weed out more marginal players. First Solar has never been the most efficient producer, but its cost advantages have given it an edge.

So far, though, First Solar has survived and will arguably benefit from that trend. Along with Trina Solar (NYSE: TSL  ) and Suntech Power (NYSE: STP  ) , First Solar continues to report double-digit gross margins even in a lousy environment. That stands in stark contrast to JA Solar (Nasdaq: JASO  ) and LDK Solar (NYSE: LDK  ) , which reported negative gross margins for the most recent quarter.

But the company still faces some major challenges. Last month, First Solar replaced former CEO Rob Gillette under less-than-clear circumstances. More important, as costs come down across the industry, First Solar's main competitive advantage starts to erode -- and so far, the company hasn't managed to increase efficiency enough to compete against leader SunPower (Nasdaq: SPWR  ) .

Looking forward, First Solar is in a tough position. As long as conventional energy prices remain high, the solar industry will have incentives to keep innovating. But with a coming shakeout for the industry, First Solar needs to focus on improving efficiency in order to maintain its strong position.

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 the best investments from the rest.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. 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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