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 KLA-Tencor (NAS: KLAC) 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 KLA-Tencor.
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%
8 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at KLA-Tencor last year, the company has lost a point. Much slower revenue growth held the company back, but shares have posted a decent gain over the past year despite having run into some choppiness more recently.
With the increasing popularity of electronic devices, semiconductor chips have become immensely important. KLA-Tencor's primary business is to help semiconductor manufacturers improve their production processes to try to increase yield and decrease the number of defective chips produced. With powerful customers Intel (NAS: INTC) , Samsung, and Taiwan Semiconductor (NYS: TSM) under its wing, KLA-Tencor has dominant market share in its niche, holding off rival Applied Materials (NAS: AMAT) and other competitors.
The semiconductor business is highly cyclical, and lately, the news has been relatively good. KLA-Tencor has beaten analyst estimates handily in each of the past two quarters, as sales throughout the semiconductor equipment industry have been strong.
The big question going forward will be whether KLA-Tencor can expand its business to boost growth. Forays into solar and LED manufacturing management could be problematic given the troubles the solar industry is going through, but with a wide variety of different products addressing numerous processes, the company has plenty of room to grow.
For KLA-Tencor to improve, all it needs is sales growth. With a solid dividend and good valuation, KLA-Tencor stands out from the tech crowd and could become a perfect stock with a little help.
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 in this article. Motley Fool newsletter services have recommended buying shares of Intel. 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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