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%||16.2%||Pass|
|1-Year Revenue Growth > 12%||9.3%||Fail|
|Margins||Gross Margin > 35%||38.9%||Pass|
|Net Margin > 15%||12.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||2.3%||Pass|
|Current Ratio > 1.3||5.28||Pass|
|Opportunities||Return on Equity > 15%||12.8%||Fail|
|Valuation||Normalized P/E < 20||21.30||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at II-VI last year, the company has dropped three full points. Weaker revenue growth, margins, and returns on equity hit II-VI's score, and the stock's 30% drop in the past year reflects much less optimistic prospects for the company going forward.
If you like lasers, you should like II-VI. The company makes optical components that are essential elements of making lasers work. That gives II-VI a key role in helping defense contractors Raytheon (NYSE: RTN ) and Northrop Grumman as well as laser manufacturer Rofin-Sinar (Nasdaq: RSTI ) optimize their respective laser applications.
But II-VI hit a big snag last year during Thailand's floods. Because it gets a lot of its components from Fabrinet, II-VI was vulnerable when Fabrinet suffered severe damage to its operations in flood-ravaged areas.
Moreover, II-VI can't afford to rest on its laurels. Cree (Nasdaq: CREE ) and the joint venture between Dow Chemical and Corning (NYSE: GLW ) are among the many competitors seeking to supplant II-VI now that it's down, and with the long-term importance of the business, they'll put up a strong fight.
II-VI took a step toward supporting its stock price yesterday by announcing a big share repurchase program. But for II-VI to defend its turf, it needs to get past its Thai setback and reignite growth. That'll be tough in a budget-cutting environment for its defense customers, but if economic growth around the world holds up, then II-VI has a fighting chance at getting closer to perfection in the years ahead.
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.
II-VI is a tech guru's fantasy stock, but there are other smart investments in the high-tech space. The Fool's latest special free report looks at the tech IPO you should be buying. It may not involve lasers, but it's still got the potential to become a giant in its field. Let me invite you to read your free copy today -- just click here to get started.
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