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 Intel (Nasdaq: INTC ) 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 Intel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.8%||Fail|
|1-Year Revenue Growth > 12%||23.8%||Pass|
|Margins||Gross Margin > 35%||62.5%||Pass|
|Net Margin > 15%||24.0%||Pass|
|Balance Sheet||Debt to Equity < 50%||16.0%||Pass|
|Current Ratio > 1.3||2.15||Pass|
|Opportunities||Return on Equity > 15%||27.1%||Pass|
|Valuation||Normalized P/E < 20||13.02||Pass|
|Dividends||Current Yield > 2%||3.2%||Pass|
|5-Year Dividend Growth > 10%||14.4%||Pass|
|Total Score||9 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Intel last year, the semiconductor giant has kept its near-perfect score of nine. Even as some raise concerns about a declining PC market, Intel is making strides toward being a bigger presence in mobile-device chips.
Intel has been running on all cylinders for the past year. With a nice bump in its stock price, it's clear that the chip leader in PCs has been doing an effective job monetizing its dominant position in the industry, especially with emerging-market growth helping power PC sales. In its most recent quarterly report, Intel reported sales that rose 22% and earnings that beat estimates.
One reason for Intel's dominance is that it has in-house production capabilities. By contrast, Advanced Micro Devices (NYSE: AMD ) spun off its GlobalFoundries manufacturing arm and has recently had low production yields on new products, raising the possibility that it might need to go to third-party producer Taiwan Semiconductor (NYSE: TSM ) to get better-quality chips.
The big criticism that Intel has gotten is that it's behind in mobile devices. Certainly, rival ARM Holdings (Nasdaq: ARMH ) has gotten a lot of attention with its chip architecture, which leading player NVIDIA (Nasdaq: NVDA ) has used to develop its quad-core Tegra 3 processor. But Intel recently announced it would release tablets and other mobile devices using its Medfield chip this year.
The growth that a serious entry into the mobile market would create could easily give Intel its final point on the way to perfection. With a healthy and growing dividend, Intel truly stands out from the crowd, and that's why I'm making a CAPScall for the chip giant to continue outperforming the overall market in the future.
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.
Find out more about the latest moves in mobile from the Motley Fool's latest special free report, "The Next Trillion-Dollar Revolution." There, you'll read more about the opportunities from the booming mobile migration as well as China's explosive growth. Get your copy now -- it's free.
Click here to add Intel to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.