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 Texas Instruments (NYSE: TXN ) 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 Texas Instruments.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(0.4%)||Fail|
|1-Year Revenue Growth > 12%||2.9%||Fail|
|Margins||Gross Margin > 35%||51.3%||Pass|
|Net Margin > 15%||20.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||52.6%||Fail|
|Current Ratio > 1.3||2.10||Pass|
|Opportunities||Return on Equity > 15%||27.4%||Pass|
|Valuation||Normalized P/E < 20||15.32||Pass|
|Dividends||Current Yield > 2%||2.2%||Pass|
|5-Year Dividend Growth > 10%||34.1%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Texas Instruments last year, the chip maker has actually dropped a point. The company has taken on substantial debt in the past 12 months yet has seen growth slow, although its dividend yield has jumped above the key 2% level.
The big news for Texas Instruments in the past year was its $6.5 billion acquisition of National Semiconductor. The move allowed TI to refocus its product portfolio toward the more lucrative analog chip market, where competitors like Linear Technology (Nasdaq: LLTC ) and ON Semiconductor (Nasdaq: ONNN ) have boasted strong margins and sales growth.
So far, the move has reaped some rewards. TI's operating margins stand to increase from their already healthy level of around 23.5%, outpacing competing companies Analog Devices (NYSE: ADI ) and Broadcom (Nasdaq: BRCM ) . Offsetting the growth that will come from National Semi coming fully on line this quarter, TI has chosen to give up on its wireless-baseband business, where Intel (Nasdaq: INTC ) and Broadcom have a bigger presence.
One interesting future prospect for TI that fellow Fool Alex Planes recently discussed is integrating a sensor-based interface into new tablets. Along with MicroVision, TI makes projection technology -- and if a mobile device could sense movement rather than requiring a touchscreen, then its shape would become almost irrelevant.
To regain its track toward perfection, TI simply needs to stay on track in integrating its National Semi purchase. If it's successful, TI could soon regain its lost point and reward shareholders for their patience.
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 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."