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 and then decide whether Advanced Micro Devices (NYSE: AMD ) 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 AMD.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.1%||Fail|
|1-Year Revenue Growth > 12%||1.1%||Fail|
|Margins||Gross Margin > 35%||44.8%||Pass|
|Net Margin > 15%||7.5%||Fail|
|Balance Sheet||Debt to Equity < 50%||126.8%||Fail|
|Current Ratio > 1.3||1.82||Pass|
|Opportunities||Return on Equity > 15%||38%||Pass|
|Valuation||Normalized P/E < 20||11.15||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.
Since we looked at AMD last year, the chipmaker has managed to keep its 4-point score. The semiconductor industry has only gotten more competitive, and AMD is having to struggle just to keep up.
In the PC world, AMD has always played second fiddle to Intel (Nasdaq: INTC ) , which has by far the dominant market share in the space. Despite offering a price advantage in some segments, AMD chips appeared in fewer desktop PC models than Intel's products.
But AMD has started to come back. In notebooks, the company has claimed some market-share victories in recent quarters. Servers also represent a big opportunity, although it's one that's full of competition, with ARM Holdings and MIPS Technologies (Nasdaq: MIPS ) sporting their own server products.
AMD has worked over the years to cultivate a relationship with Apple (Nasdaq: AAPL ) , and it has started to bear fruit. Two years ago, Apple went with AMD graphics chips exclusively for its iMac and Mac Pro systems, kicking graphics-chip rival NVIDIA (Nasdaq: NVDA ) out entirely -- although rumors have surfaced that NVIDIA might regain its place in the Apple architecture soon.
The big question for AMD will be how it does in the mobile market, where ARM Holdings is dominant and Intel is gearing up. Mobile could be the growth market AMD so desperately needs to get revenue moving in the right direction again. If AMD plays its cards right, investors could see some dramatic improvements 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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