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 Corning (NYSE: GLW ) 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 Corning.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.2%||Fail|
|1-Year Revenue Growth > 12%||16.2%||Pass|
|Margins||Gross Margin > 35%||44.6%||Pass|
|Net Margin > 15%||45.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||10.7%||Pass|
|Current Ratio > 1.3||4.48||Pass|
|Opportunities||Return on Equity > 15%||17.4%||Pass|
|Valuation||Normalized P/E < 20||9.12||Pass|
|Dividends||Current Yield > 2%||1.6%||Fail|
|5-Year Dividend Growth > 10%||0%*||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard & Poor's. *Four-year growth rate. Total score = number of passes.
When we looked at Corning last year, it also had a score of seven. A falling share price has lowered the stock's valuation and increased its dividend, but from a sales standpoint, things have remained much the same.
At first glance, Corning seems to be in all the right places. Evolving from a simple glassmaker to a technological innovator, the company helped bring on the fiber optics revolution in telecommunications. Its LCD displays help LG Display (NYSE: LPL ) and AU Optronics (NYSE: AUO ) make LCD televisions, and more importantly, smartphone makers including Apple (Nasdaq: AAPL ) , Motorola Mobility (NYSE: MMI ) , and Microsoft (Nasdaq: MSFT ) use Corning's Gorilla Glass.
But recently, Corning has warned investors about slowing future growth in some of its market segments. Last month, CFO Jim Flaws said that retail demand for LCD TVs is topping out, and several analysts weighed in with downgrades, punishing the stock. That's a problem investors have seen coming for several quarters now, but in a highly competitive space, Corning is still looking for a lasting solution.
Despite Corning's impressive showing on our 10-point scale, the company still has some work to do. If it can once again reinvent itself to evolve to the next phase of its innovation-filled history, Corning could well reach perfection.
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 Corning 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."