Is Harbin Electric the Perfect Stock?

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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 Harbin Electric (NAS: HRBN) 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 Harbin Electric.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%71.8%Pass
 1-Year Revenue Growth > 12%42.6%Pass
MarginsGross Margin > 35%30.6%Fail
 Net Margin > 15%15.8%Pass
Balance SheetDebt to Equity < 50%25.7%Pass
 Current Ratio > 1.32.44Pass
OpportunitiesReturn on Equity > 15%16.6%Pass
ValuationNormalized P/E < 209.15Pass
DividendsCurrent Yield > 2%0%Fail
 5-Year Dividend Growth > 10%0%Fail
    
 Total Score 7 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With a score of 7, Harbin Electric seems to be an energetic investment prospect. With Chinese companies right now, though, appearances can be deceiving, and uncertainty about the electric-motor manufacturer's future has thrown Harbin's shares for a loop lately.

Harbin has had to deal with plenty of intrigue in the past few months. In early June, now-infamous Citron Research called the stock's prospects into question, arguing that a proposed deal by which company chairman Tianfu Yang to take the company private at $24 per share probably wouldn't go through. That resulted in an escalating debate between Citron and Harbin, which eventually included allegations of fraud.

Harbin has done its best to respond to Citron's allegations, issuing information about a definitive buyout agreement. Yet given the impact that Citron reports have had on other companies, including Longtop Financial (NYS: LFT) , Sky-mobi (NAS: MOBI) , and Deer Consumer Products (NAS: DEER) , investors are treating Citron as a credible source and giving the shares a wide discount to their take-out value.

The main problem with Harbin as an investment right now is that with the buyout on the table, the stock's upside is limited. With many Chinese small-caps, the huge risk is counterbalanced by the potential for multibagger gains if the companies are actually on the up-and-up.

With the buyout on the table, the most investors can make from Harbin is around a 50% gain. That's pretty limited upside to compensate for the risks that Citron raises, making Harbin look like less than the perfect stock.

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.

Click hereto add Harbin Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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."

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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