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 JDS Uniphase (NAS: JDSU) 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 JDS Uniphase.
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%
4 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
When we looked at JDS Uniphase last year, it only managed to rack up three points, so the company has made a small improvement since then. But despite becoming profitable and posting decent revenue growth over the past year, the networking specialist still has plenty of work to do.
JDS Uniphase has seen some big ups and downs in the optical networking market over the past year. Back in March, after a huge run-up, Finisar (NAS: FNSR) reported strong earnings but announced that its forward outlook would fall short of what analysts expected. That sent shares of Oclaro (NAS: OCLR) , Oplink (NAS: OPLK) , and JDS Uniphase down in sympathy. Yet when May rolled around, JDS Uniphase bucked the trend by reporting earnings that doubled from the year-ago quarter.
Since then, though, even JDS Uniphase has seen some trouble. Last month, its most recent quarter showed the same troubling trend of good past results but disappointing guidance.
Even as industry giant Cisco Systems (NAS: CSCO) has seemingly hit bottom, the future looks far from certain for some of its up-and-coming rivals among the optical networkers. As long as the economy remains under pressure, JDS Uniphase will have a tough time becoming 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 contributorDan Caplingerdoesn't own shares of the companies mentioned. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems. 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 adisclosure policy.
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