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
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.
|
Factor |
What We Want to See |
Actual |
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
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
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.
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.
Click here to add II-VI to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
