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 TTM Technologies (Nasdaq: TTMI ) 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 TTM Technologies.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||31.1%||Pass|
|1-Year Revenue Growth > 12%||21.1%||Pass|
|Margins||Gross Margin > 35%||21.1%||Fail|
|Net Margin > 15%||2.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||53.3%||Fail|
|Current Ratio > 1.3||1.54||Pass|
|Opportunities||Return on Equity > 15%||5.4%||Fail|
|Valuation||Normalized P/E < 20||11.42||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With four points, TTM Technologies comes in around the middle of our scale. But the printed circuit board maker is at the heart of the mobile revolution and stands to benefit from the big rise in mobile technology.
TTM is the biggest supplier of high-end printed circuit boards in North America. With its 2010 acquisition of Hong Kong's Meadville, the company reached an even bigger scale, allowing it to serve its biggest clients. Apple (Nasdaq: AAPL ) relies on TTM for many of its products, and Cisco Systems (Nasdaq: CSCO ) also buys products from TTM. Given that both Apple and Cisco need high-volume-capable suppliers to satisfy their own demand, the customer relationship is just as important to them as it is to TTM.
Unfortunately, in its most recent quarter, TTM didn't perform as well as some had hoped. Although it beat analyst estimates on sales and earnings, those numbers shrank from last year's figures. Telecom infrastructure company Ericsson (Nasdaq: ERIC ) , which is also a big customer, and its peers cut back on orders, hurting TTM's results.
For TTM to shine, it needs to make more from the current smartphone opportunity. Revenue growth is great, but it also needs to boost its margins in order to build the profits it needs to become a perfect stock.
No stock is a sure thing, but some stocks are a lot closer to perfection 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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