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 (NYS: 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?
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%
3 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only three points, Suntech Power hasn't been soaking up the sun lately. The solar player has struggled along with its industry peers.
Suntech is a solar company that's based in China. That alone has been enough to spark some uncertainty for investors, as unrelated accounting scandals on several Chinese small-cap stocks have hurt not only Suntech's shares but also those of competitorsTrina Solar (NYS: TSL) and Yingli Green Energy (NYS: YGE) .
But the industry has faced all sorts of pressure recently. High silver prices have made panels more expensive to produce. Potential cutbacks in subsidies throughout Europe have hurt companies like First Solar (NAS: FSLR) , LDK Solar (NYS: LDK) , and JA Solar (NAS: JASO) , all of which made rapid expansions based on subsidized pricing.
Unfortunately, Suntech isn't showing any signs of an imminent recovery. Although revenue in its most recent quarter jumped 33% from year-ago levels, sales were down from the previous quarter, and the company guided revenue downward for the remainder of the year. Even though the end of its wafer supply agreement with MEMC Electronic Materials (NYS: WFR) made a big hit to earnings, Suntech still would have lost money even adjusting for one-time items.
To become a perfect stock, Suntech needs to overcome its huge debt load. Until it does, the sun isn't going shine down on its shares, even at their current bargain-basement valuations.
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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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of First Solar. 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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