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 Skyworks Solutions (NAS: SWKS) 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 Skyworks Solutions.
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.
Since we looked at Skyworks Solutions last year, the company has lost a point. Falling net margin is responsible for the loss, but the stock has done its best to minimize its price decline over the past year.
Skyworks is just one of the many companies that ride on Apple's (NAS: AAPL) coattails. With Skyworks' power amplifier included in the iPhone 4S, the company was able to cash in on the 35 million iPhones that Apple sold during the quarter. Skyworks beat analyst estimates in its own quarterly results, with a 12% jump in sales that translated to a $0.02 per-share profit beat.
But with those rewards comes big risk. Omnivision Technologies (NAS: OVTI) suffered big losses just on rumors of losing business from Apple, even though it later proved to have its cameras in the newest iPad release. TriQuint (NAS: TQNT) suffered huge losses following a difficult episode early last year, when it had trouble meeting demand in advance of the Verizon iPhone release, and the stock hasn't really recovered even with its chips in the 4S.
Moreover, the competition is fierce. Avago Technologies (NAS: AVGO) stole some market share from Skyworks in the 4S, and with Avago expanding production, Skyworks will have to work hard to defend its turf within Apple devices.
For Skyworks to improve, the ideal situation would involve its diversifying its sales to encompass more than just Apple products. Riding the Apple rocket has been good to Skyworks, but the ride won't last forever -- and Skyworks needs to keep striving if it wants 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 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 in this article. 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 in 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.