Has Plexus 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 Plexus (Nasdaq: PLXS  ) 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 the 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 Plexus.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

8.3%

Fail

 

1-year revenue growth > 12%

3.4%

Fail

Margins

Gross margin > 35%

9.5%

Fail

 

Net margin > 15%

2.7%

Fail

Balance Sheet

Debt to equity < 50%

41.9%

Pass

 

Current ratio > 1.3

2.29

Pass

Opportunities

Return on equity > 15%

10.3%

Fail

Valuation

Normalized P/E < 20

14.21

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

3 out of 10

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

Since we looked at Plexus last year, the company has earned back one of the two points it lost from 2010 to 2011. Yet the stock has fallen almost 20% over the past year.

Plexus is one of many companies behind a lot of popular electronic products in recent years. As a contract manufacturer, Plexus gets business from companies seeking a wide variety of technological solutions. For instance, it helped Coca-Cola (NYSE: KO  ) develop its Freestyle soda-vending machine, which offers buyers a touch-screen soda fountain with more than 100 flavors. Plexus also makes circuit boards for General Electric (NYSE: GE  ) that go into its advanced imaging medical equipment.

But earlier this month Plexus got some incredibly bad news, as it said it would no longer supply Juniper Networks (NYSE: JNPR  ) , its largest customer. With expectations that Juniper will cut off its business with Plexus quickly, shareholders saw the stock lose a quarter of its value over concerns about how the company will replace the 17% of 2011 revenue that Juniper represented.

Plexus, nevertheless, has optimism for the future. It points to more than $950 million in new business during 2012, some of which came from the same networking sector as Juniper. Still, concerns exist that Juniper's move could force Plexus to cut prices to be more competitive, threatening already thin margins.

For Plexus to improve, it needs to discover new growth avenues and work on making itself more profitable. That strategy represents Plexus's best chance to advance toward perfection in the future.

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.

Plexus isn't well-known, but Coca-Cola has given shareholders great long-term performance. Even with the Freestyle vending machines that Plexus helped it build, though, Coca-Cola faces some new threats to its continued market dominance. We've recently compiled a premium research report containing everything you need to know about Coca-Cola. If you own or are considering owning shares in the company, you'll want to click here now and get started!

Click here to add Plexus to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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