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 Hanwha SolarOne (Nasdaq: HSOL ) 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 Hanwha SolarOne.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||74.5%||Pass|
|1-Year Revenue Growth > 12%||12.9%||Pass|
|Margins||Gross Margin > 35%||11.6%||Fail|
|Net Margin > 15%||3.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||70.3%||Fail|
|Current Ratio > 1.3||1.43||Pass|
|Opportunities||Return on Equity > 15%||6.2%||Fail|
|Valuation||Normalized P/E < 20||3.40||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only four points, Hanwha SolarOne hasn't been shining lately. The past year has been devastating for solar stocks, but the real question is whether a turnaround is in the works.
Hanwha had a dismal 2011. In its third quarter, the company reported a 20% decrease in revenue and a big net loss, as net margins came in at -10.8%. Hanwha faces a big problem in that its cost per watt is significantly higher than its competitors', putting First Solar (Nasdaq: FSLR ) in a much stronger competitive position than Hanwha and its lower-tier peers.
But so far in 2012, solar stocks have rebounded sharply. With giants SunPower (Nasdaq: SPWR ) and Suntech (NYSE: STP ) both having reported fourth-quarter results that beat their expectations, investors clearly foresee similar outperformance from the rest of the industry. Yet Suntech forecast that shipments would decline on a sequential basis, and SunPower still sees a loss coming for its first quarter.
The big question for Hanwha is Germany. The nation has considered cutting feed-in tariffs after a record year of installations. Given the importance that Germany has for many companies, including Yingli Green Energy (NYSE: YGE ) and Suntech, a fall in German demand could severely hurt the industry, including Hanwha's prospects going forward.
Hanwha isn't perfect, and it needs to recognize the fundamental shift in the solar industry. If it can, however, then its rock-bottom valuation puts it in a strong position to deliver a nice recovery for shareholders.
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.
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