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 Analog Devices
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 Analog Devices.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 3.6% | Fail |
| 1-Year Revenue Growth > 12% | 18.9% | Pass | |
| Margins | Gross Margin > 35% | 67% | Pass |
| Net Margin > 15% | 29.8% | Pass | |
| Balance Sheet | Debt to Equity < 50% | 24% | Pass |
| Current Ratio > 1.3 | 7.80 | Pass | |
| Opportunities | Return on Equity > 15% | 26.7% | Pass |
| Valuation | Normalized P/E < 20 | 14.46 | Pass |
| Dividends | Current Yield > 2% | 3.1% | Pass |
| 5-Year Dividend Growth > 10% | 11.4% | Pass | |
| Total Score | 9 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With nine points, Analog Devices falls just short of perfection, with slow enough revenue growth over the past five years to miss a perfect 10. But there may be some storm clouds on the horizon for the company as semiconductor demand hits a rough patch.
Analog Devices makes integrated circuits that help convert real-life light, sound, and other phenomena into electrical signals. That translates into a wide range of applications, ranging from aerospace and automotive industries to health-care instrumentation and communications.
Right now, the industry is going through a period of consolidation. Earlier this year, Texas Instruments
There's no shortage of potential takeover candidates that Analog could go after. Intersil
In its most recent quarter, Analog Devices disappointed shareholders. A 4% sequential decline in revenue may not seem like a huge deal, especially with management's explanation that the previous quarter had been exceptionally strong. But with many worried that the economy could slip back into recession, any sign of slowing growth makes shareholders antsy.
With a healthy dividend that's unusual for tech companies, reasonable valuation, and strong financial performance, Analog Devices is worth a closer look. It may fall a point short of perfection, but it could be exactly the stock your portfolio needs to thrive.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.
