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 Veeco Instruments
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 Veeco Instruments.
|
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% | 119.2% | Pass | |
| Margins | Gross margin > 35% | 49% | Pass |
| Net margin > 15% | 36.9% | Pass | |
| Balance sheet | Debt to equity < 50% | 11.8% | Pass |
| Current ratio > 1.3 | 3.07 | Pass | |
| Opportunities | Return on equity > 15% | 47% | Pass |
| Valuation | Normalized P/E < 20 | 10.45 | 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 & Poor's. Total score = number of passes.
Veeco Instruments lights up the chart with a score of eight. The maker of LED-producing equipment is on the cutting edge of energy efficient technology, and the stock has reflected the company's promise over the past two years.
One of the focal points of energy conservation in recent years has been lighting. Incandescent bulbs are far less efficient than several alternatives, including fluorescent tubes, LEDs, and organic light-emitting diodes, or OLEDs. That has created a rush of players in these alternative spaces, including Cree
But to some extent, Veeco doesn't have to worry about competitive pressures. Because it supplies LED-making equipment to several market participants, Veeco only has to worry about industrywide problems rather than company-specific ones. That helps when a company like Cree foresees trouble ahead.
For now, LEDs aren't set to dominate the lighting scene, but a few years down the road, the situation may be quite different. By then, if things go right, Veeco may well have taken those last steps toward becoming a 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.
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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.
