Is Marvell Technology 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 Marvell Technology (Nasdaq: MRVL  ) 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 Marvell Technology.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 16.7% Pass
  1-Year Revenue Growth > 12% 28.6% Pass
Margins Gross Margin > 35% 59.2% Pass
  Net Margin > 15% 25% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 5.79 Pass
Opportunities Return on Equity > 15% 18.2% Pass
Valuation Normalized P/E < 20 19.23 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Marvell earns a very strong score of 8. But for its failure to pay a dividend, the semiconductor maker almost achieves perfection.

In an industry that some think of as a commodity business, Marvell has unique technical know-how in putting together multiple components on single chips. That gives Marvell exposure to several different product lines. For instance, the company serves hard-disk manufacturers Seagate (Nasdaq: STX  ) and Western Digital (NYSE: WDC  ) . Its networking segment also works with companies like Juniper Networks (NYSE: JNPR  ) and Brocade (Nasdaq: BRCD  ) to facilitate cloud computing and general networking applications. Perhaps most importantly, its technology gets used in the emerging cash-cow of mobile computing.

Recently, though, Marvell has shown some chinks in its armor. Last week, the company missed analyst estimates for fourth-quarter earnings, and also issued guidance for the coming quarter that fell short of what investors were looking for. Given the company's reliance on Research In Motion (Nasdaq: RIMM  ) in the mobile device market, which has struggled to keep up with competitors, shareholders are concerned that the company may have picked the wrong horse for the future.

Marvell has a strong track record of excellence behind it, but in the ever-changing world of technology, the company has to keep working to maintain its strength. If it can keep up with the times, it stands a great chance of becoming the perfect stock.

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 out the best investments from the rest.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Marvell Technology Group and Western Digital. Motley Fool Alpha has opened a short position on Juniper Networks, which is a Motley Fool Big Short short-sale pick. 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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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 March 07, 2011, at 11:59 AM, TheBlindCat wrote:

    I read somwhere on another board that Marvell could not start buying the $500m they recently authorized till Tuesday, is there any truth in this?

    If so, does anyone know the regulation that covers this?

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