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 Plexus (Nasdaq: PLXS ) 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 Plexus.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.8%||Fail|
|1-Year Revenue Growth > 12%||10.8%||Fail|
|Margins||Gross Margin > 35%||9.6%||Fail|
|Net Margin > 15%||4.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||52.4%||Fail|
|Current Ratio > 1.3||2.22||Pass|
|Opportunities||Return on Equity > 15%||14.7%||Fail|
|Valuation||Normalized P/E < 20||17.13||Pass|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||2 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Plexus last year, the electronics manufacturer has seen its score cut in half. Falling sales and higher debt have outweighed a slight drop in valuations over the past year.
With the huge boom in consumer electronics, you'd expect companies like Plexus, which takes the designs that other companies create and actually manufactures the products on a contract basis, to have seen huge demand. Plexus in particular has a varied customer list, ranging from Juniper Networks (NYSE: JNPR ) to General Electric (NYSE: GE ) and Coca-Cola (NYSE: KO ) .
But even with a wide customer base, Plexus has seen fears of a slowdown rise as customers get less enthusiastic about the economy. Earlier this year, Plexus cut guidance for the rest of 2011.
Going forward, though, things may be getting better. Rival Jabil Circuit (NYSE: JBL ) has seen its shares recover strongly in recent months, and Nam Tai Electronics (NYSE: NTE ) has gained attention for its dramatic dividend and growth potential. With Juniper's stock stuck near 52-week lows, though, Plexus' ties to its biggest customer could hold it back even in a more favorable overall environment.
To reach perfection, Plexus needs to work on a number of fronts to reinvigorate growth while making internal operations more efficient. Plexus won't become perfect soon, but it could get back on the right path in the near future.
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."