Has II-VI Become the Perfect Stock?

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.

Factor

What We Want to See

Actual

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.

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.

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.

Click here to add II-VI to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Rofin-Sinar, Corning, Northrop Grumman, II-VI, and Raytheon. Motley Fool newsletter services have recommended buying shares of Corning, Rofin-Sinar, and II-VI. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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