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 Entropic Communications
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 Entropic Communications.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||124.1%||Pass|
|1-Year Revenue Growth > 12%||88.5%||Pass|
|Margins||Gross Margin > 35%||54.0%||Pass|
|Net Margin > 15%||30.6%||Pass|
|Balance Sheet||Debt to Equity < 50%||0.0%||Pass|
|Current Ratio > 1.3||11.16||Pass|
|Opportunities||Return on Equity > 15%||44.3%||Pass|
|Valuation||Normalized P/E < 20||25.01||Fail|
|Dividends||Current Yield > 2%||0.0%||Fail|
|5-Year Dividend Growth > 10%||0.0%||Fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Entropic Communications gets a respectable score of 7. The company is in a hot area right now, but a lot depends on how well it can execute going forward.
Entropic is a semiconductor company, but it specializes in a very narrow niche: making ways to connect various types of home entertainment. Given the increasing need to connect cable TV, Internet, and mobile device media in a single platform, it's not surprising that Entropic was one of the 10 best tech stocks of 2010. And whereas MIPS Technologies
With demand for mobile devices on the rise, connecting them has become increasingly important. Best Buy
What is a concern, though, is Entropic's soaring stock price. But as long as the company can keep pace with the explosion in new entertainment devices, ranging from tablets like the iPad to ever more complicated smartphones, valuations are likely to be the last thing on shareholders' minds. That doesn't make Entropic perfect, but it's worth looking at more closely.
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. The Fool owns shares of Best Buy, which is a Motley Fool Inside Value and Motley Fool Stock Advisor selection. 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.