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 SanDisk (Nasdaq: SNDK ) 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 SanDisk.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||10.3%||Fail|
|1-Year Revenue Growth > 12%||10.7%||Fail|
|Margins||Gross Margin > 35%||42.2%||Pass|
|Net Margin > 15%||15.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||23.2%||Pass|
|Current Ratio > 1.3||4.52||Pass|
|Opportunities||Return on Equity > 15%||13.5%||Fail|
|Valuation||Normalized P/E < 20||11.32||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at SanDisk last year, the company has lost three full points. Growth has slowed precipitously, and plunging margins and returns on equity are taking their toll on the memory maker.
SanDisk specializes in flash memory. The popularity of solid-state drives and the increasing use of flash memory in mobile devices and other consumer electronics have stratospherically boosted demand for SanDisk products in recent years.
But lately, a glut in flash memory chips has caused dramatic price decreases. With rival Micron Technology (Nasdaq: MU ) engaged in what Fool tech analyst Anders Bylund termed a "brutal price war," SanDisk and competitors OCZ Technology (Nasdaq: OCZ ) and Spansion (NYSE: CODE ) have all felt the heat. Another sign that industry leaders expect flash memory to become a commodity business came when Intel (Nasdaq: INTC ) sold two of its flash-memory production facilities to Micron, suggesting that Intel sees no need to have an in-house source for supply.
Earlier this month, SanDisk announced that its sales and earnings for the first quarter would fall well short of previous expectations. The announcement pushed SanDisk shares sharply lower, and when the company's actual earnings report came out, the stock fell even further.
Still, as long as demand remains strong, SanDisk should have a shot at regaining its former glory. With potential uses for cloud computing, the solid-state drives that rely on flash memory could become the next booming tech business -- and in the process, pull SanDisk back up toward perfection.
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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