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 Dolby Laboratories
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 Dolby Laboratories.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||23%||Pass|
|1-Year Revenue Growth > 12%||24.2%||Pass|
|Margins||Gross Margin > 35%||87.8%||Pass|
|Net Margin > 15%||31.9%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||6.40||Pass|
|Opportunities||Return on Equity > 15%||20%||Pass|
|Valuation||Normalized P/E < 20||20.08||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.
Dolby manages to score seven points and comes just a hair away from an eighth. Although the company has faced some hard times lately, it has the dominant position in its industries to stage a comeback.
If it involves sound, odds are that Dolby has something to do with it. The company is the leading provider of audio entertainment technology, with a strong presence in the movie theater, consumer electronics, and software realms. Gaming represents a huge part of Dolby's business, with Microsoft
One problem that Dolby has faced stems from the move from PCs to tablets like the iPad. Dolby has high-margin license agreements with notebook makers that it will now need to roll over to tablet makers. However, as companies like Netflix
Despite its challenges, Dolby has quite a few attractive elements. Without a dividend, it isn't the perfect stock, but as the industry continues to expand, Dolby should have a place in it for years to come.
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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