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Is Monolithic Power Systems the Perfect Stock?

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 Monolithic Power Systems (Nasdaq: MPWR  ) 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 Monolithic Power Systems.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.4% Fail
  1-Year Revenue Growth > 12% (10.2%) Fail
Margins Gross Margin > 35% 51.7% Pass
  Net Margin > 15% 6.8% Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 8.11 Pass
Opportunities Return on Equity > 15% 5.4% Fail
Valuation Normalized P/E < 20 55.91 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only three points, Monolithic Power Systems isn't looking very powerful. Despite a big bounce in its shares recently, investors have to wonder if the company has what it takes to show its staying power in a tough industry.

Monolithic Power is a semiconductor company. The company makes chips that help manage and convert current from DC sources to the integrated circuits that need them in everything from computers to monitors, televisions, and sound amplifiers.

Unfortunately, that area has a lot of competition. Avago Technologies (Nasdaq: AVGO  ) was lucky enough to get its power amplifier chip into the iPhone 4S, which is almost always a good sign for a company. Moreover, Cirrus Logic (Nasdaq: CRUS  ) has been looking to get itself into the power-chip market.

In its fourth quarter, Monolithic Power posted mixed news. On one hand, its revenue dropped by more than 10%. But net income came in above expectations, sending the shares higher. That's arguably better than competitor Micrel (Nasdaq: MCRL  ) did, as it reported earnings and sales that fell significantly from year-ago levels. Texas Instruments (NYSE: TXN  ) , on the other hand, came in with an earnings beat thanks to its much more diversified portfolio of chips.

For Monolithic Power to get closer to perfection, it needs to find its way into some of the more popular electronic products on the market. If it can break into the big time, then the sky's the limit for the small company. Otherwise, though, Monolithic is likely to just keep treading water with the other small fish.

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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Click here to add Monolithic Power Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Texas Instruments and Cirrus Logic. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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