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 Qualcomm (Nasdaq: QCOM ) 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 Qualcomm.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||14.7%||Fail|
|1-Year Revenue Growth > 12%||36.2%||Pass|
|Margins||Gross Margin > 35%||68.3%||Pass|
|Net Margin > 15%||28.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||4.3%||Pass|
|Current Ratio > 1.3||2.70||Pass|
|Opportunities||Return on Equity > 15%||19%||Pass|
|Valuation||Normalized P/E < 20||26.61||Fail|
|Dividends||Current Yield > 2%||1.5%||Fail|
|5-Year Dividend Growth > 10%||14.0%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Qualcomm last year, the communications equipment giant has picked up a point, seeing its revenue soar over the past year. Growth in the mobile market has taken off recently, and there doesn't seem to be any obvious end in sight.
Qualcomm has two main things going for it. First, it has a hugely valuable set of patents and intellectual property that cover nearly every aspect of 3G networks. The company is also moving quickly to build its patent portfolio for 4G, covering both LTE and WiMAX, although its position isn't as dominant as it is with 3G.
In addition, the company sells its own chips and integrated circuits, with a particular emphasis on the mobile area. While Intel (Nasdaq: INTC ) has struggled to get its own mobile offerings to market, Qualcomm has built a big head start, one that it's already used to get its products into the new iPhone 4S. NVIDIA (Nasdaq: NVDA ) also has made big strides in the mobile chip market, and it beat Qualcomm to market with its quad-core mobile Tegra 3 processor. But Qualcomm is poised to release its own quad-core offering this year.
As it turned out, one of Qualcomm's most desirable assets is its wireless spectrum. AT&T (NYSE: T ) got FCC approval in late December to buy spectrum from Qualcomm for $1.9 billion, which the mobile giant badly needed after losing out on its attempt to take over T-Mobile.
For Qualcomm to sustain its advantage and advance toward perfection, it needs only to keep boosting its dividend and wait for an inevitable correction in its stock. When that happens, Qualcomm will be as close to perfect as you can expect it to get.
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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