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 JA Solar (NAS: JASO) 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 JA Solar.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of 5, JA Solar doesn't inspire a lot of energy. The company faces not only the challenges the rest of the solar industry is dealing with but also the stigma of being a Chinese company at a time when uncertainty about the quality of financial reporting from the emerging nation has never been higher.
Solar companies have struggled as of late. Falling prices of solar cells and polysilicon hurt many companies including JA Solar, although vertically integrated companies like Yingli Green Energy (NYS: YGE) and Trina Solar (NYS: TSL) didn't feel the full brunt of the price pressure. Even experts don't seem to understand the economics of solar power and have therefore fled the industry, leaving most solar stocks with rock-bottom valuations.
To try to bolster their dirt cheap stock prices, many solar companies, including LDK Solar (NYS: LDK) , Renesola (NYS: SOL) , and JA Solar, have initiated stock buybacks. The advantage to JA Solar, though, is that it already has locked in sold long-term debt rather than relying on short-term loans that could become problematic in a potential credit crunch.
It's entirely possible that a new era of government austerity could reduce subsidies and jeopardize the entire solar industry. But with stocks priced as if that's a virtual certainty, those with some tolerance of risk might want to take a gamble on stocks like JA Solar. If anything other than the worst-case scenario plays out, investors could quickly see it as a perfect stock.
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 our13 Steps to Investing Foolishly.
At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.
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