Has Cognex Become 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 Cognex (Nasdaq: CGNX  ) 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 Cognex.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 7.1% Fail
  1-year revenue growth > 12% 6.2% Fail
Margins Gross margin > 35% 75.8% Pass
  Net margin > 15% 21.7% Pass
Balance sheet Debt to equity < 50% 0% Pass
  Current ratio > 1.3 6.84 Pass
Opportunities Return on equity > 15% 12.9% Fail
Valuation Normalized P/E < 20 27.08 Fail
Dividends Current yield > 2% 1.3% Fail
  5-year dividend growth > 10% 2.6% Fail
       
  Total score   4 out of 10

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

Since we looked at Cognex last year, the company has lost a point. A big decrease in revenue growth is responsible for the drop, but the stock has beaten the broader market over the past year.

Cognex helps companies improve their manufacturing processes through higher-quality automation. With systems that give machines something approximating human vision, Cognex customers can cut costs beyond what lower-tech automated solutions allow.

The company cites several favorable experiences from its customer base. ABB (NYSE: ABB  ) used Cognex vision technology to develop a high-speed picking application that enhanced its productivity. Eli Lilly (NYSE: LLY  ) chose Cognex's In-Sight to help it develop its automatic tray handling and inspection system, while Ford (NYSE: F  ) has used Cognex technology to ensure welds and valve holes are well-placed and durable.

Lately, Cognex has been performing very well. With earnings and revenue growth that topped estimates, the company recently raised its dividend and appears poised for a strong future. One big potential growth area for the company is in China, and the company has focused on boosting its presence there.

Cognex doesn't have the field to itself, though, with KLA-Tencor (Nasdaq: KLAC  ) and other competitors building automated solutions of their own. Yet Cognex's focus on automation gives it an edge over larger, more diversified providers like KLA-Tencor.

For Cognex to keep advancing, it needs to accelerate growth and get its returns on equity up. In a sluggish global economy, that may be difficult, but in the long run, Cognex could well get itself much closer to perfection.

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.

Cognex isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Cognex 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 in this article. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Cognex, ABB, and Ford, as well as creating a synthetic long position in Ford. 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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