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 Monolithic Power Systems
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 Monolithic Power Systems.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||13.4%||Fail|
|1-Year Revenue Growth > 12%||(10.2%)||Fail|
|Margins||Gross Margin > 35%||51.7%||Pass|
|Net Margin > 15%||6.8%||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||8.11||Pass|
|Opportunities||Return on Equity > 15%||5.4%||Fail|
|Valuation||Normalized P/E < 20||55.91||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only three points, Monolithic Power Systems isn't looking very powerful. Despite a big bounce in its shares recently, investors have to wonder if the company has what it takes to show its staying power in a tough industry.
Monolithic Power is a semiconductor company. The company makes chips that help manage and convert current from DC sources to the integrated circuits that need them in everything from computers to monitors, televisions, and sound amplifiers.
Unfortunately, that area has a lot of competition. Avago Technologies
In its fourth quarter, Monolithic Power posted mixed news. On one hand, its revenue dropped by more than 10%. But net income came in above expectations, sending the shares higher. That's arguably better than competitor Micrel
For Monolithic Power to get closer to perfection, it needs to find its way into some of the more popular electronic products on the market. If it can break into the big time, then the sky's the limit for the small company. Otherwise, though, Monolithic is likely to just keep treading water with the other small fish.
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. The Motley Fool owns shares of Texas Instruments and Cirrus Logic. 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.