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 Skyworks Solutions (Nasdaq: SWKS) 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 Skyworks Solutions.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10.3% Fail
  1-Year Revenue Growth > 12% 38.4% Pass
Margins Gross Margin > 35% 43.5% Pass
  Net Margin > 15% 15.4% Pass
Balance Sheet Debt to Equity < 50% 1.7% Pass
  Current Ratio > 1.3 4.94 Pass
Opportunities Return on Equity > 15% 14.5% Fail
Valuation Normalized P/E < 20 31.91 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Skyworks weighs in with a score of 5. The semiconductor company has made a big splash on the market lately, but only time will tell whether the stock lives up to its full potential.

Skyworks has been firing on all cylinders lately, thanks to its prominent place within the Apple (Nasdaq: AAPL) iPhone 4. In its most recent quarterly report, the company beat analyst estimates on earnings and revenue, as well as pushing guidance upward for the coming quarter.

But storm clouds may be on the horizon. One analyst recently voiced concerns that Skyworks could see some of its chips replaced with those of competitors TriQuint Semiconductor (Nasdaq: TQNT) and Avago Technologies (Nasdaq: AVGO) in the upcoming iPhone 5 release. Moreover, the company hasn't made as much of its iPhone opportunity as some of its competitors and industry peers, with TriQuint, Avago, and audio supplier Cirrus Logic (Nasdaq: CRUS) all sporting much higher returns on equity while trading at lower earnings multiples than Skyworks.

Skyworks certainly doesn't have to worry about a complete collapse just yet. But if it wants to become a perfect stock, it needs to solidify its position as a leading chip provider for the growing mobile market.

Keep searching
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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.