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, and then decide if Infinera (NAS: INFN) 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 Infinera.
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 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Infinera last year, the company has lost a point. A big drop in sales in the past year is responsible for the lower score, even though the stock has managed to tread water, but the company has a new product coming out that could change things going forward.
Infinera makes photonic integrated circuits, which it has used throughout its short history to transform the industry. In simple terms, the company puts pieces of a network on its chips and allows cost-effective transformations from optical signals to electrical impulses. That's especially important as Internet traffic grows, because Verizon (NYS: VZ) and AT&T (NYS: T) need cheaper solutions in order to build out the networks the market wants.
Unfortunately, those telecom giants haven't been keeping up their end of the bargain, slashing their capital spending last year. That trend has started to reverse itself, however, as Juniper Networks (NYS: JNPR) reported higher orders and beat estimates. Still, though, Infinera has had trouble, missing sales estimates in the first quarter of 2012.
Infinera also faces more direct competition. With Oclaro (NAS: OCLR) looking to merge with Opnext, the combined company would have higher revenue than Infinera. Infinera certainly doesn't need a tougher competitive environment, given that it has already suffered losses for years.
Infinera's best chance to improve will come from its new DTN-X product, which just started shipping last week. The platform brags five terabits per second of optical transport network switching capacity, which makes networks more efficient and lowers costs. If DTN-X comes out as well as past products, then it could be the key to Infinera's success in the years to come.
No stock is a sure thing, but some stocks are a lot closer to perfection 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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The article Has Infinera Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Infinera. Motley Fool newsletter services have recommended buying shares of Infinera. 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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