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 JDS Uniphase (NAS: JDSU) 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 JDS Uniphase.
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%
3 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at JDS Uniphase last year, the company gave back the point it had earned between 2010 and 2011 as it once again saw normalized earnings retreat into red ink. The stock has managed a modest gain of just over 10%, but it still has plenty of challenges to face looking forward.
JDS Uniphase is an important component of the huge revolution in wireless communications, providing optical products and performance equipment for the telecommunications sector. Given the huge demand for connectivity due to the rise of mobile devices, you'd expect the need for JDS Uniphase's products to be sky-high right now.
So far, though, that demand largely hasn't materialized. Alcatel-Lucent (NYS: ALU) has seen four straight quarters of revenue drops of 10% or more, and Ciena (NAS: CIEN) and Acme Packet (NAS: APKT) have struggled against ever-tighter competition and the reluctance of major telecom companies to ramp up capital expenditures. During the spring, those pressures caused substantial share-price declines pretty much throughout the space.
Things may be looking up for JDS Uniphase. In its most recent quarter, JDS Uniphase reported substantially better sales and earnings compared to what analysts were expecting. The company is still conservative on its future outlook, but the real key is whether telecom giants AT&T (NYS: T) and Verizon will start ramping up their spending to better their networks.
For JDS Uniphase to improve, it needs to entice its major customers into opening their wallets and choosing its products over its competitors. The company needs to regain profitability before it can seriously consider other moves toward achieving long-term perfection.
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.
JDS Uniphase's experience shows that telecom equipment isn't the best play on technology right now. Let us suggest a different path. We've created a report called "The Next Trillion-Dollar Revolution" that details a hidden component play inside mobile phones, and we name the company at the forefront of the mobile trend. You can access this new report today by clicking here -- it's free.
Click hereto add JDS Uniphase to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has JDS Uniphase Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Acme Packet. 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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