Is Skyworks Solutions the Perfect Stock?

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 Skyworks Solutions (Nasdaq: SWKS  ) 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 Skyworks Solutions.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10.3% Fail
  1-Year Revenue Growth > 12% 38.4% Pass
Margins Gross Margin > 35% 43.5% Pass
  Net Margin > 15% 15.4% Pass
Balance Sheet Debt to Equity < 50% 1.7% Pass
  Current Ratio > 1.3 4.94 Pass
Opportunities Return on Equity > 15% 14.5% Fail
Valuation Normalized P/E < 20 31.91 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

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

Skyworks weighs in with a score of 5. The semiconductor company has made a big splash on the market lately, but only time will tell whether the stock lives up to its full potential.

Skyworks has been firing on all cylinders lately, thanks to its prominent place within the Apple (Nasdaq: AAPL  ) iPhone 4. In its most recent quarterly report, the company beat analyst estimates on earnings and revenue, as well as pushing guidance upward for the coming quarter.

But storm clouds may be on the horizon. One analyst recently voiced concerns that Skyworks could see some of its chips replaced with those of competitors TriQuint Semiconductor (Nasdaq: TQNT  ) and Avago Technologies (Nasdaq: AVGO  ) in the upcoming iPhone 5 release. Moreover, the company hasn't made as much of its iPhone opportunity as some of its competitors and industry peers, with TriQuint, Avago, and audio supplier Cirrus Logic (Nasdaq: CRUS  ) all sporting much higher returns on equity while trading at lower earnings multiples than Skyworks.

Skyworks certainly doesn't have to worry about a complete collapse just yet. But if it wants to become a perfect stock, it needs to solidify its position as a leading chip provider for the growing mobile market.

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 Skyworks Solutions 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 Motley Fool has bought calls on TriQuint and owns shares of Apple, TriQuint, and Cirrus Logic. Motley Fool newsletter services have recommended shares of Apple as well as creating a bull call spread position in Apple. 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 May 19, 2011, at 1:31 PM, jrmart wrote:

    Apple likes to use multiple suppliers and is always updating their product line to maintain a competitive advantage, so I wouldn't put all my eggs in the SKYWORKS basket.

    Apple also bought exclusive licensing rights from companies like LQMT Liquid Metal in August 2010. Everybody thought that Apple was going to make the next IPHONE out of LIQUIDMETAL. Instead of doing that, Apple filed for a patent to make fuel cells using liquidmetal.

    Now the Swatch Group, a MEGA multi brand watch manufacturing company also bought exclusive rights from LQMT to use in their watch lines. Click on the link below for that announcement.

    http://www.liquidmetal.com/images_2/pr1arial.jpg

    LQMT might be a potential long term winner several years from now because they are also being evaluated by the DOD for military applications and the oil companies for drilling applications.

    LQMT is a penny stock (investors beware) trading around 50 cents a share.

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