Is Universal Display the Perfect Stock?

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 Universal Display (Nasdaq: PANL  ) 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 Universal Display.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 20.8% Pass
  1-Year Revenue Growth > 12% 69.4% Pass
Margins Gross Margin > 35% (6.3%) Fail
  Net Margin > 15% (75%) Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 3.40 Pass
Opportunities Return on Equity > 15% (32.7%) Fail
Valuation Normalized P/E < 20 NM 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.

With just four points, Universal Display isn't close to perfection. But the company's promising technology gives the stock a lot of potential for future gains.

Universal Display is a pioneer in organic light-emitting diodes, or OLEDs. The technology uses organic compounds that produce light when electricity passes through them, making it useful in applications from televisions and computer screens to lighting. The company counts Sony (NYSE: SNE  ) among its customers.

But where the future for OLED technology really shines is in smartphone displays. Universal Display already has licensing agreements with Samsung and LG Display (NYSE: LPL  ) , but it still has plenty of room to run. With smartphones from Motorola Mobility (NYSE: MMI  ) , Nokia (NYSE: NOK  ) , and Dell (Nasdaq: DELL  ) among many using OLED screens, Universal Display has a huge opportunity to break into the market in a bigger way.

So far, Universal Display hasn't cracked that nut, and its string of net losses bears that out. But if the company can capitalize as its technology finally hits mainstream applications, profits could be right around the corner -- and this could look a lot more like the perfect stock in the years to come.

Keep searching
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 the best investments from the rest.

Click here to add Universal Display to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Universal Display is a Motley Fool Rule Breakers recommendation. 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.


Read/Post Comments (8) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2011, at 12:05 PM, TMFBreakerJava wrote:

    PANL seems likely to see very large revenue growth this year and those negative margins are likely to go positive. That 70% growth is a hint that this company is on the tipping point. Recent weakness is a chance to get in IMO

  • Report this Comment On February 23, 2011, at 1:01 PM, gmdavis62 wrote:

    Hopefully, this is some insight that will help you know when the OLED market will begin to turn around.

    The reason Apple was unable to find a supplier with high enough volume to supply OLEDs, the high cost, and the reason they are developing light panels with the technology are all related. There is a huge issue with a high reject rate for OLED production. No supplier has (yet) figured out how to eliminate defects. (This is the reason for the high cost and short supply. It is easier to create a light panel because that can have defects without affecting light output.) Once this technological barrier is solved, the cost will drop, the supply will increase and the superior quality of these screens will make all other displays obsolete. Look for this trigger.

  • Report this Comment On February 24, 2011, at 2:49 PM, jrusso9722 wrote:

    PANL is heading Uptown!! Consider FOLEDS, Flexible Organic LED's. FOLED resists shock, it bends, with NO DISTORTION IN DIGITS, ETC. Every car, aircraft, home, TV, War Room, Industrial Display, theater, on and on.....will be a market for FOLEDS. No longer limited to flat displays.Commercial and Naval Vessels will have a contoured Combat Information Center, CIC, or Bridge-Helm. US Navy ships can save weight, space by designing FOLEDS into the CIC. Combat Aircraft can wrap FOLED displays around the cockpit, not just direct ahead, in a flat display. Current, state of the art flat displays will be yesterday's technology, when FOLEDS arrive. ICC lights on trucks will be FOLEDS, designed into the sheet metal, Emergency Vehicles will have FOLEDS designed into the sheet metal, no more stuck-on lights, etc. As MotleyFool indicates, buy it now!!

  • Report this Comment On February 24, 2011, at 4:07 PM, JGO0913 wrote:
  • Report this Comment On March 03, 2011, at 11:47 PM, MegaEurope wrote:

    PANL bulls have been predicted imminent profitability for the last 5 years - and they have always been wrong.

    TMFBreakerJava: "That 70% growth is a hint that this company is on the tipping point."

    And yet they have a -75% net margin. That's a hint that they are nowhere near the tipping point.

    "Recent weakness is a chance to get in IMO"

    Recent weakness, is that a joke? PANL has gone parabolic over the last year.

    When Cisco or Pets.com were down 5% from all-time highs, was that a time to buy on recent weakness?

  • Report this Comment On March 03, 2011, at 11:49 PM, MegaEurope wrote:

    *predicting

  • Report this Comment On March 06, 2011, at 12:23 PM, antonioexpo wrote:

    sure it's a perfect trading stock but dear friends at Fool you have to acknowledge that the price is excessive. you have to be responsible!!! even if they grow sales many many many times over it is still overvalued. Why don't you mention that?? you are supposed to be responsible in your comments!!!

  • Report this Comment On March 06, 2011, at 12:30 PM, ETFsRule wrote:

    I would stick with a safer LED play: VECO

    They have it all: excellent fundamentals, rapid growth, great valuation, etc. There's just no need to speculate on a company like PANL when you could buy VECO instead.

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