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 TriQuint Semiconductor 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 TriQuint.
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%
2 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at TriQuint last year, the company has had its score cut in half, as margins fell and the company became unprofitable. The stock has also performed badly, falling 25% over the past year.
For years, TriQuint has had its fortunes inexorably linked with those of smartphone giant Apple . Going into the fourth quarter, the news that TriQuint's chips had gotten into the iPhone 5 seemed like a surefire ticket to success. But the latest iPhone hasn't lived up to the lofty expectations that investors had for Apple, and as a result, shares of both Apple and suppliers like TriQuint have fallen on hard times.
But lately, another challenge has emerged. Last month, Qualcomm came out with a chipset that incorporates a huge number of different functions, including the same radio-frequency work that TriQuint's chips do. TriQuint and its peers saw their shares drop substantially on the news, with the fear that handset makers will just go straight to Qualcomm rather than assemble their own chip designs piecemeal.
In its most recent quarter, TriQuint disappointed investors with weak future guidance. Although earnings and sales both came in above analyst expectations, views for a poor first quarter were unexpectedly dire, with revenue seen 8% to 12% below consensus and a loss of $0.12 to $0.14 per share comparing unfavorably to the pros' calls for a break-even quarter.
For TriQuint to improve, it needs to come up with a way to distinguish itself from its fellow component suppliers. Otherwise, consolidation moves like the one Qualcomm is making could eventually threaten its entire business and put an abrupt halt to its quest for 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.
TriQuint is far from the only company that has benefited from Apple's huge gains in recent years. But what's unclear is whether Apple itself remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
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The article Has TriQuint Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Qualcomm, and TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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