Is SunPower the Perfect Stock?
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 SunPower (NAS: SPWRA) 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 SunPower.
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, SunPower isn't lighting up the scoreboard. The entire solar industry is going through huge changes right now, but not everyone believes that SunPower is doomed to fail.
As fellow Fool and solar expert Travis Hoium wrote last week, SunPower is at one end of the spectrum in the solar industry. While First Solar (NAS: FSLR) is the cost leader in the industry, SunPower tops the list in terms of panel efficiency. Although SunPower's stock doesn't trade at quite the bargain price-to-book ratio of fellow solar playersJA Solar (NAS: JASO) and LDK Solar (NYS: LDK) , that efficiency lead is worth a somewhat higher multiple -- one that makes its normalized P/E look artificially inflated.
Unfortunately, even as the world wants growth in renewable energy, SunPower faces a roadblock: the Solyndra scandal. SunPower could use loan guarantees to help with proposed projects in the southwestern U.S., but if the government chooses to eliminate those guarantees, the projects might not get done, hurting demand throughout the industry.
Earlier this year, energy giantTotal (NYS: TOT) took a majority stake in SunPower. That's a vote of confidence that the company will survive industry turmoil stronger than ever. Nevertheless, what the company calls "challenging market conditions" have made investors fearful of its future.
Because innovation is a key to excelling in any budding industry, SunPower has better chances for long-term success than its current score indicates. If it can get through the current rough patch in the industry, SunPower could easily get a lot closer to perfection in the near future.
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 our 13 Steps to Investing Foolishly.
At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of Total, Cypress Semiconductor, and 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 a disclosure policy.
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