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 Marvell Technology (Nasdaq: MRVL) 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 Marvell Technology.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.7% Fail
  1-Year Revenue Growth > 12% (6.1%) Fail
Margins Gross Margin > 35% 56.8% Pass
  Net Margin > 15% 18.1% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 5.22 Pass
Opportunities Return on Equity > 15% 11.7% Fail
Valuation Normalized P/E < 20 24.70 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Marvell Technology last year, the company's score has collapsed, getting cut in half. Contracting sales and weaker earnings combined to push the stock's valuation higher.

Marvell has its chips in a wide variety of areas, including hard drives, networking components, and mobile devices. Unfortunately for its mobile sales, Marvell has Research In Motion (Nasdaq: RIMM) as a major customer. As RIM's prospects have headed south in the face of iPhone and Android competition for the BlackBerry, Marvell has seen its sales come under pressure as well.

Moreover, competition is fierce in other areas as well. LSI (NYSE: LSI) has done very well in the hard-drive controller chip market lately, and at least one analyst believes its success is coming at Marvell's expense. That's not a trend that Marvell can afford to see continue.

One area of future growth could come from China. Marvell has about 70% market share in TD-standard smartphones in China, where it's fighting tooth and nail with Spreadtrum (Nasdaq: SPRD). But with China Mobile (NYSE: CHL), which is a customer of both Spreadtrum and Marvell, slowing down its phone production process, the opportunity may not prove as strong as either company would hope.

For Marvell to turn things around, it needs to build better relationships with winning players in the mobile area. Only then will sales start rising again, pushing the chipmaker back up toward perfection once more.

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.