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 OmniVision Technologies (Nasdaq: OVTI ) 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 OmniVision Technologies.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.6%||Fail|
|1-Year Revenue Growth > 12%||9.6%||Fail|
|Margins||Gross Margin > 35%||29.7%||Fail|
|Net Margin > 15%||10.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||6.5%||Pass|
|Current Ratio > 1.3||6.20||Pass|
|Opportunities||Return on Equity > 15%||13.4%||Fail|
|Valuation||Normalized P/E < 20||14.11||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 OmniVision Technologies last year, the company has lost a point. A big drop in revenue growth is responsible for the lower score, but far more troubling is the fact that the stock has lost more than half its value over the past year.
In recent years, OmniVision owes much of its success to its role in providing key components for Apple's (Nasdaq: AAPL ) red-hot smartphones and tablets. With each new iPhone and iPad model, the big question for OmniVision is whether its camera sensors make it into the device. For instance, with the company providing both rear and front cameras for the latest iPad, OmniVision was able to bounce off its lows last year with an impressive advance.
But there are problems with relying on a big customer. Skyworks Solutions (Nasdaq: SWKS ) and Avago Technologies (Nasdaq: AVGO ) have been fighting it out in the power amplifier chip market, with huge stakes on the line. Meanwhile, TriQuint (Nasdaq: TQNT ) is still trying to recover from its problems in meeting demand for the Verizon iPhone early last year.
In fact, OmniVision suffered greatly when Sony stole away its spot in the iPhone 4S. With the iPad news, OmniVision clearly hopes to wrestle that spot back for the critical iPhone 5.
For OmniVision to keep improving, what it needs is the revenue growth that would come from being in the iPhone 5 and other popular devices. If that happens, then OmniVision could resume its march toward perfection as early as later this year.
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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