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 Power-One 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 Power-One.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

17.2%

Pass

 

1-year revenue growth > 12%

(1.6%)

Fail

Margins

Gross margin > 35%

27.9%

Fail

 

Net margin > 15%

9.6%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

2.64

Pass

Opportunities

Return on equity > 15%

23.3%

Pass

Valuation

Normalized P/E < 20

6.41

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Power-One last year, the company dropped a point for the second year in a row. After some big swings, the stock has given shareholders essentially flat performance over the past year.

Power-One is a solar company, but it's not in the same business as better-known solar panel manufacturers. Instead, Power-One produces inverters, which collect the direct-current electricity from panels and other alternative energy production methods and convert it to AC power for household use.

Still, just being affiliated with solar has hurt Power-One. With even industry giant First Solar having posted losses this year, Power-One stands out for still eking out a profit. Despite facing competition from Enphase and Satcon as well as American Superconductor's attempts to break into the inverter market, Power-One hasn't had much trouble fighting off upstarts.

In fact, even with the solar industry in shambles, Power-One has shown some signs of improvement lately. Market share has been on the rise, helping the company remain the No. 2 seller of inverters in the global market, and the company has a huge amount of cash on its balance sheet.

Looking forward, just as First Solar and SunPower have started to push out weaker competition from Chinese players Trina Solar and ReneSola, Power-One needs to start pushing out the weaker competitors in order to give itself stronger pricing power. If it can achieve that goal, then Power-One has the capacity to start moving back up toward perfection once the solar industry finally hits bottom and reaches a new equilibrium.

Keep searching
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.

The plunge in solar has hit First Solar especially hard, but like Power-One, the solar giant seems poised for a rebound. Is now the time to buy First Solar? If you're looking for our recommendation on how to play First Solar along with continuing updates and guidance on the company whenever news breaks, we've created a brand new report that details every must know side of this stock. To get started, just click here now.

Click here to add Power-One to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Power-One 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 Enphase and Power-One. Motley Fool newsletter services recommend First Solar. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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