Has Tesla Motors 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 Tesla Motors (Nasdaq: TSLA  ) 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 Tesla Motors.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 334.0% Pass
  1-Year Revenue Growth > 12% (11.9%) Fail
Margins Gross Margin > 35% 26.0% Fail
  Net Margin > 15% (222.3%) Fail
Balance Sheet Debt to Equity < 50% 705.6% Fail
  Current Ratio > 1.3 1.11 Fail
Opportunities Return on Equity > 15% (166.6%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   1 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Tesla Motors last year, the company has lost two points. Yet even with revenue gains reversing themselves, the stock has risen almost 40% in the past year in anticipation of a major new step forward in the car company's short history.

Tesla has become a pioneer in the electric-car industry. With the release of its all-electric Model S sedan last month, the company is hoping to deliver a better experience to luxury buyers than rivals Ford (NYSE: F  ) and General Motors (NYSE: GM  ) can deliver. With the high-end Model S offering a range of up to 300 miles and massive acceleration, Ford's electric Focus and its 100-mile range just can't compete.

Yet the big question is whether the cost of Tesla's cars will be a big deterrent to sales. Even with gas at $4 per gallon, the cost difference between a Model S and a lower-priced conventional gas-powered car would buy you enough fuel to take you hundreds of thousands of miles.

For now, Tesla is producing some massive losses. But that should end once the company starts fulfilling the roughly 12,000 "reservations" for Model S cars that it has received.

The big question for Tesla is how competition will stack up to demand. With General Electric (NYSE: GE  ) planning to spend $1 billion on gasoline-free cars for its fleet, there may be buyers for electric vehicles even if mainstream consumers opt out. Yet with Toyota's (NYSE: TM  ) Prius still selling strongly, it's uncertain whether going the extra step toward all-electric vehicles is necessary.

For Tesla to improve, it needs to have a success with its Model S. Profitability shouldn't be a problem, and if it is, then Tesla may never reach perfection.

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.

Tesla Motors may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Meanwhile, both GE and Ford also have some good prospects. Learn more about each with our brand-new premium report on GE and our similar report on Ford.

Click here to add Tesla Motors 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. The Motley Fool owns shares of Tesla and Ford. Motley Fool newsletter services have recommended buying shares of General Motors, Ford, and Tesla, as well as creating a synthetic long position in Ford. 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2012, at 2:39 PM, nonqual wrote:

    <<Profitability shouldn't be a problem,>>

    Right, Milo Minderbender! The operating margin on the 2,300 Roadsters sold in four years exceeded a negative 100%. The model S is a bigger car, with more features, at a lower price, with a bigger, more expensive battery, yet it will be magically profitable. What Tesla loses on each one sold will be made up by the increased volume.

    The revenue increase is a sucker's trap.

  • Report this Comment On August 20, 2012, at 3:43 PM, Borisbmx wrote:

    Tesla goal 30% gross profit on each car. They have sufficent demand, but at the moment the red flag seems to be manufacturing.

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