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 MEMC Electronic Materials (NYS: WFR) 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 MEMC Electronic Materials.
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%
2 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.
With only two points, MEMC Electronic Materials hasn't been shining on investors lately. The maker of silicon wafers is facing tough times on two different fronts.
MEMC's products have applications both in computing and in solar energy production. It supplies base materials for chip production to customers that include Taiwan Semiconductor (NYS: TSM) . That segment has faced problems from bad effects of the Japanese earthquake as well as higher operating expenses.
In addition, solar stocks have gotten crushed lately. Just as oversupply problems plague Chinese companiesLDK Solar (NYS: LDK) , JA Solar (NAS: JASO) , and ReneSola (NYS: SOL) , MEMC also sees weaker demand for its solar wafers. Moreover, industry experts believe that pressure on MEMC and its peers will only get worse in the coming quarters.
Interestingly, MEMC is working on innovative ways to create partnerships. Earlier this year, it announced a deal with real-estate company DDR (NYS: DDR) to deploy solar installations on the rooftops of 200 U.S. shopping centers.
Earlier this week, MEMC lowered its earnings forecast for the rest of the year. Despite reporting revenue for the third quarter that beat analyst expectations, the company now expects full-year GAAP revenue of $2.7 billion to $3 billion and GAAP earnings to produces losses of $0.35 to $0.55 per share.
To improve its poor showing, MEMC needs to get itself back to GAAP profitability and survive what's likely to be a big shakeout among solar stocks in the near future. If it can beat its competition, MEMC could emerge stronger and better poised to reach for perfection.
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 contributor Dan Caplinger doesn't own shares of the companies mentioned. 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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