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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if electronic manufacturing company Plexus (Nasdaq: PLXS ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Plexus.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||10.4%||fail|
|1-Year Revenue Growth > 12%||24.5%||pass|
|Margins||Gross Margin > 35%||10.1%||fail|
|Net Margin > 15%||4.4%||fail|
|Balance Sheet||Debt to Equity < 50%||21.3%||pass|
|Current Ratio > 1.3||2.04||pass|
|Opportunities||Return on Equity > 15%||15.2%||pass|
|Valuation||Normalized P/E < 20||20.71||fail|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Plexus comes in with a far-from-perfect score of 4. Because it offers a wide variety of manufacturing services in the electronics industry, though, the company's worth a closer look.
When it comes to electronics, if you want it done, you can take it to Plexus. The company manufactures a wide array of products in the networking and wireless infrastructure industry, as well as other businesses including medical technology, defense and aerospace applications, and general industrial manufacturing.
Unfortunately, Plexus faces strong competition in this low-margin business. But Plexus has managed slightly wider margins than its larger peers Flextronics (Nasdaq: FLEX ) and Jabil Circuit (NYSE: JBL ) . Even Benchmark Electronics (NYSE: BHE ) and Sanmina-SCI (Nasdaq: SANM ) can't hit the double-digit gross margins that Plexus enjoys.
In terms of growth prospects, Plexus is solidly in the middle of the pack with estimates of 15% earnings growth in the next five years. That puts it ahead of Flextronics and Jabil, on par with Benchmark, and slightly behind Sanmina. But at its current valuation, Plexus is the priciest of the five.
In its industry, Plexus will have to stay plucky to generate profit growth. If you don't want the challenges of picking a winner in this tough industry, you don't have to feel bad looking beyond Plexus in search of the 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 out the best investments from the rest.
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