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 Rofin-Sinar Technologies (NAS: RSTI) 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 Rofin-Sinar Technologies.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With a score of five, Rofin-Sinar Technologies cuts a precisely half-perfect showing. The laser-maker has seen strong revenue growth and offers a reasonable valuation, but like many tech companies, it hasn't seen fit to return money to shareholders through dividends.
Rofin-Sinar makes lasers that help companies in a wide variety of industries improve their manufacturing processes. Formed as a spinoff from German conglomerate Siemens (NYS: SI) in 1996, Rofin-Sinar serves the auto industry with cutting and welding techniques for vehicle production to micro-drilling for semiconductors and electronics.
But Rofin-Sinar has faced several challenges recently. Slow economic activity has hurt the largely cyclical company. In addition, the surge in fiber-laser technology that IPG Photonics (NAS: IPGP) has ridden to success lately threatens Rofin's dominance in the laser segment. Niche players Newport (NAS: NEWP) and Coherent (NAS: COHR) have also benefited from the resurgence in the semiconductor industry.
Moreover, earnings haven't given investors the confidence they'd like to have in the company. Last week, Rofin-Sinar guided its fiscal first-quarter revenue and earnings targets down sharply, sending shares tumbling from what had been a nice recovery in October.
At current prices, Rofin-Sinar could well reward patient investors who believe that a faster economic expansion is coming. If you're willing to pay a little more, though, laser-optic maker II-VI (NAS: IIVI) , which makes the optical components that Rofin and its competitors need for their laser applications. Given time, the whole industry could find itself pushing the perfection envelope in the years ahead.
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. The Motley Fool owns shares of IPG Photonics, Rofin-Sinar Technologies, and II-VI. Motley Fool newsletter services have recommended buying shares of IPG Photonics, II-VI, and Rofin-Sinar Technologies. 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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