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 Western Digital
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 Western Digital.
Factor |
What We Want to See |
Actual |
Pass or Fail? |
---|---|---|---|
Growth |
5-year annual revenue growth > 15% |
17% |
Pass |
|
1-year revenue growth > 12% |
(3.3%) |
Fail |
Margins |
Gross margin > 35% |
18.8% |
Fail |
|
Net margin > 15% |
7.6% |
Fail |
Balance sheet |
Debt to equity < 50% |
5.4% |
Pass |
|
Current ratio > 1.3 |
2.53 |
Pass |
Opportunities |
Return on equity > 15% |
14.2% |
Fail |
Valuation |
Normalized P/E < 20 |
13.36 |
Pass |
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 & Poor's. Total score = number of passes.
With four points, Western Digital doesn't store enough points for perfection. The hard drive maker may seem like it has outdated technology, but it's still going strong despite some weakness in computer shipments.
Looking at the world of technology today, you might think that Western Digital's days were numbered. With PC sales giving way to smartphones and tablets that use solid-state memory from companies like SanDisk
But that way of thinking ignores the reality of the global economy. According to Intel
Earlier this year, concerns about a glut of hard drives from Seagate, Hitachi
Eventually, if solid-state drive prices fall in line with hard drives, then Western Digital could be in trouble. But under current conditions, the company is in a strong position to benefit from emerging-market growth -- and has an attractively cheap valuation as well. Western Digital isn't perfect, but it could potentially produce nice returns for investors.
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."