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 Trina 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 Trina Solar.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 100% | Pass |
| 1-Year Revenue Growth > 12% | 97.3% | Pass | |
| Margins | Gross Margin > 35% | 30.5% | Fail |
| Net Margin > 15% | 15.2% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 47.9% | Pass |
| Current Ratio > 1.3 | 2.07 | Pass | |
| Opportunities | Return on Equity > 15% | 29.7% | Pass |
| Valuation | Normalized P/E < 20 | 6.21 | Pass |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 7 out of 10 |
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Trina shines with seven points. But the solar industry has gone through plenty of turmoil in recent years, and the future isn't as cloudless as a solar stock would like.
Trina is a Chinese company that produces solar modules, and lately the company has been growing like gangbusters. Earlier this year, Trina announced expectations to increase its capacity from 1.2 gigawatts at the end of 2010 to 1.9 gigawatts by 2012. The company remains smaller than Chinese leader Suntech Power
But several factors are making things tough on Trina and other panel makers. First, a drop in European demand has hurt solar companies that rely on the continent's market, including LDK Solar
In addition, silver prices have roughly doubled in the past year, and with silver a key element to making solar panels, Trina has been unable to reduce its total non-silicon cost of production. Although DuPont
Most recently, troubles among Chinese stocks have everyone walking on eggshells. Yesterday, Trina shares dropped 12% as the company's audit committee chair resigned.
Of course, if Trina doesn't meet the same fate as those Chinese small-caps that have faced fraud allegations, then the current valuation may prove to be a huge bargain. Still, Trina won't be perfect until it proves itself among its peers as well as in the court of public opinion.
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.
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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."
