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 TriQuint Semiconductor (NAS: TQNT) 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 TriQuint Semiconductor.
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: S&P Capital IQ. Total score = number of passes.
With only four points, TriQuint Semiconductor isn't getting close to perfection. Despite earning a place in one of the hottest devices in the market, the stock has performed horribly over the past year.
TriQuint makes semiconductor products for the defense, aerospace, and communications industries. But its key business right now is making radio-frequency chips for mobile devices. Right now, that's a huge industry, and TriQuint's status as one of Apple's (NAS: AAPL) suppliers has brought the company out of obscurity and into the limelight.
But being so reliant on a single customer brings huge volatility. TriQuint and Skyworks Solutions (NAS: SWKS) both had chips in iPhone products in the past, but when the Verizon iPhone became available, TriQuint couldn't meet demand and therefore didn't get its components into the phone. Then when the iPhone 4S became available, TriQuint took two out of four available spots, with Skyworks and Avago (NAS: AVGO) each taking one.
Yet TriQuint's guidance and results haven't matched up to that good news. Late last year, falling demand for older models of Apple products was apparently responsible for an earnings disappointment. Then last month, the stock dropped precipitously after TriQuint posted weak margins and gave disappointing future guidance to investors, despite having record revenue and analyst-beating earnings.
The big challenge to TriQuint's success going forward is Avago's multifunction signal processor, which does the job of several rival chips. For TriQuint to reach perfection, it needs continued success on Apple products as well as technological advances that keep it at the head of the supply chain.
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.
Mobile devices have made a lot of investors rich. Find out more about profit opportunities in the Motley Fool's free special report: "3 Hidden Winners of the iPhone, iPad, and Android Revolution." Let me invite you to take a look by clicking here.
Click hereto add TriQuint Semiconductor to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of TriQuint Semiconductor and Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position on Apple. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.