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 II-VI (Nasdaq: IIVI ) 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 II-VI.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||16.6%||Pass|
|1-Year Revenue Growth > 12%||62.5%||Pass|
|Margins||Gross Margin > 35%||40.8%||Pass|
|Net Margin > 15%||15.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.7%||Pass|
|Current Ratio > 1.3||3.98||Pass|
|Opportunities||Return on Equity > 15%||17.5%||Pass|
|Valuation||Normalized P/E < 20||29.50||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 7, II-VI beats both numerals in its name. The company has been flying high on strong earnings lately and has the fundamentals to back up its strong performance here.
II-VI has an interesting combination of businesses. Its optical components get used in a variety of laser-related applications, ranging from precision cutting and drilling to early warning missile detection. With additional military products, the company serves defense contractors including Northrop Grumman (NYSE: NOC ) and Raytheon (NYSE: RTN ) . In addition, II-VI makes semiconductor substrate from which other equipment makers can create their own products.
But as Rising Star Portfolio player Rex Moore points out, with such a wide range of businesses, the company also faces plenty of competition. Cree (Nasdaq: CREE ) and the Dow Corning joint venture between Dow Chemical (NYSE: DOW ) and Corning (NYSE: GLW ) are just two of the companies that keep II-VI investors nervous.
But so far, II-VI is doing everything right. Last month, the company crushed analyst earnings estimates, largely because of an acquisition of one of its smaller competitors. And with increased guidance for the year, II-VI rewarded shareholders with a more than 20% pop.
II-VI's business is cyclical, and with concerns about defense spending, there's always the chance that the good times could slow down for the company. But with the important niche that II-VI fills, there should always be demand for its products -- making the shares worth considering even at a somewhat lofty current valuation.
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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