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 Suntech Power (NYSE: STP) 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 Suntech Power.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 28.8% Pass
  1-Year Revenue Growth > 12% (16.0%) Fail
Margins Gross Margin > 35% 7.7% Fail
  Net Margin > 15% (44.2%) Fail
Balance Sheet Debt to Equity < 50% 281.8% Fail
  Current Ratio > 1.3 0.64 Fail
Opportunities Return on Equity > 15% (86.5%) 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 Suntech Power last year, the company has lost two points. More importantly, it has gone from being profitable to posting huge losses, and the shares have fallen by more than 80% in the past year.

The solar industry has had a huge shakeout recently. With big cuts in government subsidies, solar companies have clearly taken big hits to their bottom lines. Moreover, several companies, including Yingli Green Energy (NYSE: YGE) and JA Solar (Nasdaq: JASO), have cut their estimates on shipments of solar panels for the year.

But Suntech faces a unique challenge. Last month, the company said that it may have fallen prey to a financial fraud scam involving a solar investment in Europe. With Suntech having guaranteed a credit line whose government bond collateral turns out not to have ever existed, the company could be on the hook for $683 million in debt. With Suntech's Dr. Zhengrong Shi having stepped down from his CEO role after the discovery that he was an owner in this European solar investment fund, Suntech's future will be clouded by controversy for quite a while.

One big issue that Chinese manufacturers like Suntech will have to deal with is how to get around U.S. anti-dumping tariffs. The move imposes new costs on Suntech and other Chinese solar players, while clearly giving First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWR) a big competitive advantage in the U.S. market.

For Suntech to survive, it needs to beat out its Chinese competitors and start trying to gather economies of scale. Unfortunately, the company faces a steep uphill battle if it wants to stay afloat, let alone get closer to perfection.

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.

For those interested in a stronger solar play than Suntech, you can learn more about First Solar's prospects in the Fool's latest premium report. Our top solar energy analysts share their viewpoints and will keep you updated with a year of free check-ins. Get your report today.

Click here to add Suntech Power to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.