By Dan Caplinger, The Motley Fool
Filed under: Investing
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 Solazyme 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 Solazyme.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-year annual revenue growth > 15% |
162.9%* |
Pass |
|
1-year revenue growth > 12% |
13.2% |
Pass |
|
|
Margins |
Gross margin > 35% |
88% |
Pass |
|
Net margin > 15% |
(188.5%) |
Fail |
|
|
Balance sheet |
Debt to equity < 50% |
8.2% |
Pass |
|
Current ratio > 1.3 |
6.63 |
Pass |
|
|
Opportunities |
Return on equity > 15% |
(39.2%) |
Fail |
|
Valuation |
Normalized P/E < 20 |
||
|
Dividends |
Current yield > 2% |
0% |
Fail |
|
5-year dividend growth > 10% |
0% |
Fail |
|
|
Total score |
5 out of 9 |
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes. * Four-year growth rate.
Since we looked at Solazyme last year, the company has picked up a point, as revenue growth picked up a bit in 2012. The stock, though, plunged by more than half over the past year.
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Source: FULL ARTICLE at DailyFinance