Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if InterDigital
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many areas, which come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 InterDigital.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||19.1%||Pass|
|1-Year Revenue Growth > 12%||34.3%||Pass|
|Margins||Gross Margin > 35%||83.9%||Pass|
|Net Margin > 15%||42.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.2%||Pass|
|Current Ratio > 1.3||2.86||Pass|
|Opportunities||Return on Equity > 15%||73.5%||Pass|
|Valuation||Normalized P/E < 20||15.18||Pass|
|Dividends||Current Yield > 2%||0.8%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||8 out of 9|
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; InterDigital just declared its first dividend. Total score = number of passes.
InterDigital comes just shy of a perfect score, with its freshly declared dividends coming in below our 2% yield target. But its strategy is one that other companies have used to great success, and InterDigital appears to be just getting started.
InterDigital is a big name in the wireless arena, but you won't see any smartphones with its name on them. Rather, InterDigital makes its money by patenting key wireless technology that other industry players, including Apple
Despite -- or perhaps because of -- a big jump in its share price recently, InterDigital has many people betting against it. In January, short interest in the stock was at a 52-week high, with 16.3 percent of shares outstanding shorted.
With shares having doubled just since August, it's easy to argue that the stock has risen too far too fast. But for now, it simply looks like investors know a near-perfect stock when they see it, and even after the big jump, shares aren't incredibly richly valued. With a market cap of just $2.1 billion, InterDigital has plenty of room to run if it can continue to develop the technology that smartphone consumers crave.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. InterDigital and Apple are Motley Fool Stock Advisor choices. The Fool has written puts on Apple. The Fool owns shares of Apple and Qualcomm. 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.