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 InterDigital (Nasdaq: IDCC ) 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 InterDigital.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(6.8%)||Fail|
|1-Year Revenue Growth > 12%||(14.8%)||Fail|
|Margins||Gross Margin > 35%||79.9%||Pass|
|Net Margin > 15%||31.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||42.6%||Pass|
|Current Ratio > 1.3||4.67||Pass|
|Opportunities||Return on Equity > 15%||26.8%||Pass|
|Valuation||Normalized P/E < 20||18.49||Pass|
|Dividends||Current Yield > 2%||1.1%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: S&P Capital IQ. NM = not meaningful; InterDigital initiated its dividend in April 2011. Total score = number of passes.
Since we looked at InterDigital last year, the wireless technology company has lost two points. A big decline in revenue is to blame for the drop, although its new dividend is a positive step for investors.
InterDigital found itself at the center of attention over the past year. Its rich collection of key wireless technology patents attracted big players in the mobile industry after bankrupt Nortel's patent portfolio got a flurry of bids, with a consortium including industry giants Apple (Nasdaq: AAPL ) and Research in Motion (Nasdaq: RIMM ) eventually winning. Google then decided to buy out Motorola Mobility in a move that was likely motivated largely by intellectual property as well. At that point, InterDigital threw its patents into the ring.
The value of such patents was further underscored by VirnetX (AMEX: VHC ) , which won a big settlement from Microsoft in 2010 and also has suits pending against Apple and others. Yet as the market cooled off for patent sales, both VirnetX and InterDigital saw their shares slump as well.
Unfortunately, it looks like InterDigital missed its big chance to sell out at a big profit. Late last month, the company announced that a strategic review found no buyers for its wireless patents. The news sent the stock plunging as hopes for a premium bid evaporated.
For InterDigital to regain its past near-perfect score, it needs to get revenue moving back upward again. That means signing licensing deals or seeing big settlements come in. Those sales could be a long time coming, but eventually, the boom in mobile technology could result in a big payoff for InterDigital.
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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