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 KLA-Tencor
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 KLA-Tencor.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||7.5%||Fail|
|1-Year Revenue Growth > 12%||84.2%||Pass|
|Margins||Gross Margin > 35%||60.3%||Pass|
|Net Margin > 15%||23.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||27.9%||Pass|
|Current Ratio > 1.3||4.00||Pass|
|Opportunities||Return on Equity > 15%||27.1%||Pass|
|Valuation||Normalized P/E < 20||12.28||Pass|
|Dividends||Current Yield > 2%||2.5%||Pass|
|5-Year Dividend Growth > 10%||20.1%||Pass|
|Total Score||9 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
KLA-Tencor scores a near-perfect nine points, falling short only on long-term revenue growth. For now, the stock offers the perfect combination of healthy dividends, good value, and strong financials.
As an integral part of the semiconductor industry, KLA-Tencor makes test equipment to help chip makers like Intel
Still, KLA-Tencor has plenty of competition and peers to measure up to. While Applied Materials
Rather than its competitors, the biggest threat to KLA-Tencor in the near future may well come from its hitting the wall on earnings growth. Analysts expect earnings per share to fall in the company's 2012 fiscal year from 2011 levels. Yet even that drop would put the current share price at less than 10 times forward earnings. In a red-hot technology sector, that sounds like the perfect steal for a near-perfect stock.
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 Motley Fool owns shares of Applied Materials. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on Intel. 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.