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 LDK Solar (NYS: LDK) 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 LDK 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%
1 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at LDK Solar last year, the company's score has plunged by three points. Falling revenue and a loss of profitability have pushed down the solar company, and conditions in the industry have never been worse.
The solar industry is going through a painful period of oversupply. With huge competitive pressures, some companies are faring better than others. SunPower (NAS: SPWR) , for instance, managed to improve its gross margins in its most recent quarter, something that has eluded nearly all of its peers. Meanwhile, First Solar (NAS: FSLR) has maintained its cost advantage over SunPower, although lower efficiency has started to threaten its gross margins.
By comparison, though, most Chinese manufacturers are in much worse shape. Both LDK Solar and ReneSola (NYS: SOL) sported negative gross margins in their most recent quarters when you exclude one-time items, and even relatively healthy Suntech Power (NYS: STP) has found itself under threat from its large debt load. New U.S. tariffs on Chinese manufacturers will also take their toll in the quarters to come.
The key question for LDK Solar and its Chinese peers is how the Chinese government handles the sprawling solar industry within the emerging-economy nation. If it forces consolidation, then there will inevitably be winners and losers.
At this point, it doesn't seem likely that LDK Solar would win out in any event. With so much competition, it would take a lot for LDK Solar ever to become 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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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have 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 a disclosure policy.
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