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 FuelCell Energy (Nasdaq: FCEL) 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 FuelCell Energy.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 29.8% Pass
  1-Year Revenue Growth > 12% 51.2% Pass
Margins Gross Margin > 35% (6.5%) Fail
  Net Margin > 15% (32.4%) Fail
Balance Sheet Debt to Equity < 50% 54.1% Fail
  Current Ratio > 1.3 1.12 Fail
Opportunities Return on Equity > 15% (61.3%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   2 out of 9

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

Since we looked at FuelCell Energy last year, the company has lost a point. Higher revenue helped bolster the alternative energy company, but a big increase in debt has hurt its balance sheet.

At first glance, FuelCell looks like a highly speculative play at best. Although the company managed to eke out a positive gross margin in its third-quarter results last year, it still is losing substantial amounts of money. Still, the stock has rebounded sharply in 2012, as both FuelCell and rival Ballard Power (Nasdaq: BLDP) have benefited from higher sales recently.

Much of FuelCell's recent success comes from a big order from the utility subsidiary of South Korea's POSCO (NYSE: PKX). POSCO Energy ordered another 120 megawatts of fuel cell capacity in addition to making a $30 million investment in FuelCell itself.

But FuelCell will need the much-larger POSCO's help to ward off big competitors. Both General Electric (NYSE: GE) and United Technologies (NYSE: UTX) are looking to bolster their presence in the commercial fuel-cell market, with GE especially interested in the niche as another component of its larger focus on alternative energy. Given the financial resources that United Technologies and GE have, they'll be formidable opponents for tiny FuelCell to deal with.

For FuelCell to become a perfect stock, it first needs to become profitable on a consistent basis. Until fuel-cell technology takes off as a more mainstream solution for energy needs, FuelCell will continue to struggle to keep its income out of the red.

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.