Has Analog Devices 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 Analog Devices (Nasdaq: ADI  ) 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 Analog Devices.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.2% Fail
  1-Year Revenue Growth > 12% (10.7%) Fail
Margins Gross Margin > 35% 64.6% Pass
  Net Margin > 15% 24.1% Pass
Balance Sheet Debt to Equity < 50% 20.9% Pass
  Current Ratio > 1.3 8.97 Pass
Opportunities Return on Equity > 15% 16.9% Pass
Valuation Normalized P/E < 20 21.51 Fail
Dividends Current Yield > 2% 3.0% Pass
  5-Year Dividend Growth > 10% 10.4% Pass
       
  Total Score   7 out of 10

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Analog Devices last year, the company has seen its score drop by two points. Falling revenue growth and a much higher valuation were responsible for the plunge, but shareholders have to be relatively pleased with the nearly 25% gain the stock has enjoyed in the past year.

Analog Devices makes integrated circuits for a wide range of applications. By converting light, sound, and other input to electrical signals, the company's devices allow electronic equipment to monitor and process the resulting data in ways that help their customers.

The key to understanding the semiconductor industry is that it's highly cyclical. Earlier this year, good news from Intel (Nasdaq: INTC  ) and Texas Instruments (NYSE: TXN  ) suggested that the industry might be in for another mini-cyclical bounce, as both companies posted some impressive results that included strong sales and stable demand. Analog Devices advanced strongly in response, and Qualcomm (Nasdaq: QCOM  ) also looks favorably placed to take advantage of new industry growth.

But earlier this week, Analog Devices disappointed investors with drops in revenue and profit. Even worse, the company said that its fiscal fourth-quarter revenue and earnings will come in below expectations. That suggests that any mini-cyclical advance may have run its course, at least for Analog Devices.

For Analog Devices to improve, it needs to ride the next cyclical wave up to restore revenue growth. Otherwise, last year's nine-point showing may prove to be the closest that Analog Devices ever gets 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.

Intel has a lot of opportunities, but it also faces challenges. Get one of our top tech analyst's thoughts on the stock by checking out this brand-new premium research report on Intel. Inside, you'll receive a comprehensive assessment of the risks and opportunities, as well as all of the key issues to understand before investing. Claim your copy today by clicking here.

Click here to add Analog Devices 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 Intel and Qualcomm. Motley Fool newsletter services have recommended buying shares of Intel. 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.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1994961, ~/Articles/ArticleHandler.aspx, 12/21/2014 4:18:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement