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%
0 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at MEMC Electronic Materials last year, the company lost both of its remaining points. A revenue drop and lower current ratio resulted in the score dropping, and the stock has also been in the dumps, losing about 60% over the past year.
MEMC is one of the U.S.'s largest makers of polysilicon, second only to Hemlock, a joint venture that is majority-owned by Corning (NYS: GLW) and Dow Chemical (NYS: DOW) . Polysilicon is used in both semiconductor production as well as making photovoltaic products for the solar industry. Over the years, MEMC's solar-related sales have grown at a much faster pace than its semiconductor revenue.
Unfortunately, the solar industry has gone into a tailspin in the past year, as falling subsidies and a glut of solar modules have thrown many industry players for a loop. First Solar (NAS: FSLR) and SunPower (NAS: SPWR) have both seen an influx of solar panel products from Chinese manufacturers lead to annual losses, with First Solar's fall from profitability looking especially harsh. With SunPower announcing layoffs and production closures and other players making more significant restructurings, there's plenty of turmoil in solar right now.
In August, MEMC saw a brief break in the clouds, as its second-quarter earnings report suggested a possible bottom in the solar market. With MEMC subsidiary SunEdison seeing solar system sales rise sixfold over the year-ago quarter, the company was able to overcome lower average prices for its products to post unexpectedly strong revenue figures.
For MEMC to recover, it needs to start emphasizing its semiconductor manufacturing to a greater extent and look for high-efficiency plays in the solar side of its business. Unless it can succeed in getting off the floor, MEMC may never get much closer to 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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The article Has MEMC Electronic Materials Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Corning. Motley Fool newsletter services recommend First Solar and Corning. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.