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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 Advanced Micro Devices (NYSE: AMD ) 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 Advanced Micro Devices.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.1%||Fail|
|1-Year Revenue Growth > 12%||20.2%||Pass|
|Margins||Gross Margin > 35%||45.6%||Pass|
|Net Margin > 15%||7.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||239.0%||Fail|
|Current Ratio > 1.3||2.15||Pass|
|Opportunities||Return on Equity > 15%||34.4%||Pass|
|Valuation||Normalized P/E < 20||NM||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
AMD only manages to rack up four points. The company continues to languish in the shadow of its rivals despite having opportunities to outperform on its own.
For years, investors have seen AMD as the perennial also-ran to Intel (Nasdaq: INTC ) in the PC processor business. Just looking at Intel's numbers on the metrics above reveals a huge difference; Intel is profitable, has huge margins, and pays a healthy dividend, while AMD continues to struggle to make money at all.
More recently, AMD has had opportunities to make its own mark. With its graphics chips, AMD went head-to-head against Intel and NVIDIA (Nasdaq: NVDA ) with some success. And as Intel ran into design flaw problems that led to a large recall, AMD seemed poised to take advantage.
Yet the recent departure of former CEO Dirk Meyer leaves AMD without an established leader at a crucial time. AMD can't move forward strongly with its leadership vacuum, ceding the initiative to innovative players like ARM Holdings (Nasdaq: ARMH ) and its Wintel-threatening architecture that could soon make inroads into the PC space.
AMD isn't a hopeless cause. But after repeatedly failing to execute on promising opportunities, it's hard to argue that it will become a perfect stock anytime soon.
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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