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 LDK Solar
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 LDK Solar.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||118.6%||Pass|
|1-Year Revenue Growth > 12%||151.9%||Pass|
|Margins||Gross Margin > 35%||25.4%||Fail|
|Net Margin > 15%||14.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||215.6%||Fail|
|Current Ratio > 1.3||0.68||Fail|
|Opportunities||Return on Equity > 15%||37.7%||Pass|
|Valuation||Normalized P/E < 20||2.90||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just four points, LDK isn't shining too brightly. The solar energy producer is in a promising industry and trades at a ridiculously cheap valuation, but it's also struggling with a huge debt load.
Solar stocks in general are going through a strange period right now. Many of LDK's peers, including Trina Solar
Moreover, solar stocks are seeing several supports right now. Oil prices remain high, making solar energy look attractive. Also, Germany's decision to give up on nuclear power and redirect future energy investment to solar and wind power suggest even more demand for LDK products, since the company gets 20% of its sales from Germany.
But oversupply is hanging over the market, and LDK is struggling to find cash. The company delayed a debt offering last month, and despite attempts to raise money by getting rid of its polysilicon business, a sluggish market is creating difficulties.
At these prices, LDK is essentially a lottery ticket. The company could possibly fail, but if it doesn't, intrepid shareholders could see amazing returns on their investment.
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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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 in this article. 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.