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.
What We Want to See
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.
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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