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 Veeco Instruments (NAS: VECO) 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 Veeco Instruments.
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.
Since we looked at Veeco Instruments last year, the company has seen its score plunge three points. A contraction in revenue over the past year and weaker margins are responsible for the drop, and the shares haven't performed very well either.
A year ago, LED lighting looked like the wave of the future that would bring big profits to Veeco as a maker of equipment used to manufacture LEDs. Yet the entire LED industry has suffered through a glut of supply and weaker demand, and both Cree (NAS: CREE) and Aixtron (NAS: AIXG) have joined Veeco in predicting tough times ahead. Moreover, with General Electric (NYS: GE) having looked into LED lighting, competition may get fierce as profits become harder to come by.
Another challenge may come from organic LEDs from Universal Display (NAS: PANL) . OLEDs bring energy savings and more flexibility in their use than traditional LEDs, which could eventually make them more popular.
Recently, though, Veeco seems to have halted its stock skid. In its most recent quarterly report, Veeco managed to beat low expectations. Despite posting lower revenue and earnings, the company beat analysts' estimates and jumped more than 15% on the news.
For Veeco to keep improving, it needs to restart revenue growth and get itself back on the upswing in staying profitable. Only through an LED revolution can Veeco hope to become 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.
Veeco Instruments isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click hereto add Veeco Instruments 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 in this article. The Motley Fool owns shares of Universal Display. Motley Fool newsletter services have recommended buying shares of Universal Display. 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.