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 SunPower
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 SunPower.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 76.5% | Pass |
| 1-Year Revenue Growth > 12% | 45.1% | Pass | |
| Margins | Gross Margin > 35% | 18.7% | Fail |
| Net Margin > 15% | 0.9% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 54.9% | Fail |
| Current Ratio > 1.3 | 1.68 | Pass | |
| Opportunities | Return on Equity > 15% | 1.2% | Fail |
| Valuation | Normalized P/E < 20 | 68.17 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only three points, SunPower isn't lighting up the scoreboard. The entire solar industry is going through huge changes right now, but not everyone believes that SunPower is doomed to fail.
Cypress Semiconductor
As fellow Fool and solar expert Travis Hoium wrote last week, SunPower is at one end of the spectrum in the solar industry. While First Solar
Unfortunately, even as the world wants growth in renewable energy, SunPower faces a roadblock: the Solyndra scandal. SunPower could use loan guarantees to help with proposed projects in the southwestern U.S., but if the government chooses to eliminate those guarantees, the projects might not get done, hurting demand throughout the industry.
Earlier this year, energy giant Total
Because innovation is a key to excelling in any budding industry, SunPower has better chances for long-term success than its current score indicates. If it can get through the current rough patch in the industry, SunPower could easily get a lot closer to perfection in the near future.
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.
