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 Cognex
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 Cognex.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||5.6%||Fail|
|1-year revenue growth > 12%||59.1%||Pass|
|Margins||Gross margin > 35%||73.9%||Pass|
|Net margin > 15%||21.7%||Pass|
|Balance sheet||Debt to equity < 50%||0%||Pass|
|Current ratio > 1.3||5.65||Pass|
|Opportunities||Return on equity > 15%||14.8%||Fail|
|Valuation||Normalized P/E < 20||28.08||Fail|
|Dividends||Current yield > 2%||1%||Fail|
|5-year dividend growth > 10%||(2.6%)||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Cognex scores in the middle of the road with five points. But the company's technology is anything but mediocre and in fact promises to change the way manufacturing works.
Cognex is a leader in what's known as "machine vision" -- automated inspection using cameras, sensors, and software that together mimic the human eye. By replacing what used to be done manually with Cognex systems, companies like Ford
For now, the company is giving investors a volatile ride. A few months back, shares plunged after quarterly results disappointed shareholders, despite showing 66% earnings growth and a 46-fold increase in earnings per share. But earlier this month, the company reversed that negative opinion, soaring after beating expectations, posting huge growth, and hiking its dividend for the third time in a year.
But Cognex has advantages over some of its competition. Both Perceptron and Orbotech
Cognex has a ways to go before it reaches perfection. But with a process that could save companies millions of dollars, you'll likely see Cognex's score go up in the 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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Cognex, Ford, and National Instruments are Motley Fool Stock Advisor choices. The Fool owns shares of Ford. 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.